Recently I’ve been looking into Lee Enterprises (LEE). I heard about the stock from Harris Kupperman (Kuppy) who has talked about it on his newsletter and blog. Lee is a news company that owns 77 local newspapers across the US. The market has written off Lee as a dying newspaper business and the stock trades at ridiculously low multiples: 2x EBITDA, 5x FCF, and 10x earnings. While the market is probably right in assuming print news is in serial decline, it’s missing the fact that Lee is swiftly transitioning away from print: it’s in the midst of a digital transformation posting terrific growth numbers.
Lee has three revenue sources: subscriptions, advertising and marketing, and digital services. The subscription and advertising segments make up >90% of Lee’s revenue, so I’ll mostly be focusing on them in this post and ignoring digital services for now (though digital services may have some serious hidden value in it…).
Lee offers two types of subscriptions: full-access (print and digital) and digital-only. Some numbers that showcase their digital subscriber growth: Lee has 402,000 digital-only subscribers – they’ve been growing digital subscribers at >50% YoY for the past 2 years and aim to hit 900,000 digital-only subscribers by 2026. I estimate the average digital subscription to be $7/month (Lee’s lack of transparency on their numbers is a problem I’ll get to later and potentially another reason why the market has glossed over them). On the print side, Lee delivers >1 million papers daily and another >1.2 million on Sundays. I took a look at the population of every US city Lee owns a newspaper in and on average, 18.96% of people have a Lee newspaper delivered to them – in print – daily. Think about that – in these small cities, nearly every 1 in 5 people buys a Lee newspaper daily. In a lot of places, Lee’s paper might be the only source of local news. That is a considerable moat. While full-access subscribers might decline over the next decade, Lee’s strong penetration in small communities will translate to more page views and clicks for their digital platforms.
On the advertising side, we can also split things into print and digital. Lee’s newspapers have nearly 60 million unique visitors and 400 million page views on average per month. These numbers have stayed relatively strong in spite of a weaker news cycle in 2021. The reason for this is that demand for local news will always exist – regardless of what’s happening on the national level, when people want to hear about why there was a police helicopter flying over their home or what’s happening to the shopping mall being built by their house, they go to local news. The first step to strong advertising growth is attracting eyeballs, and it seems like Lee has that down. On the print advertising side, I agree with consensus that revenues will fall.
Overall, with conservative assumptions, I see revenue staying relatively flat over the next ten years, as declining print revenue seems to be balanced out by modest digital growth.
The next question is what do LEE’s margins look like? Graphing EBITDA margin over the past 15 years reveals their margins have consistently stayed above 20% which isn’t bad. However, in the last two years margins have sunk to below 15% which is troubling. LEE’s largest institutional shareholder Cannell Capital (who I’ll talk more about a bit later) has also commented on this in their 13F. I haven’t figured out what caused the sudden drop in LEE’s margins yet (let’s just call it COVID for now…) so I’ll follow up on that in a later post. Cannell seemed to indicate it might have to do with pension issues. Anyways, assuming LEE can return to its remarkably consistent historical margins, we can forecast EBITDA fairly reliably.
I guess this post has sort turned into a “how to value LEE post,” but that’s okay because I think it’ll demonstrate how undervalued LEE is and why this is a great stock (and sector – local news) to do some deeper research on. The last step in our valuation is getting from EBITDA to FCF. CAPEX and depreciation aren’t a huge deal. The big one here is interest expenses. LEE has a ton of debt, nearly 200m market cap stock with ~600m in debt at a 9% interest rate. Large interest expenses have been haunting LEE, eating at their cash flow, but as LEE repays their debt, those interest expenses reduce and suddenly cash flow starts to grow significantly. LEE has paid off nearly 60 million in debt pa for the last two years and will likely continue to do so – they have shown they are willing to commit close to 100% of FCF to debt repayment.
Turn all of this into a fleshed out DCF and suddenly you’ll see that there’s ridiculous upside here. My price target is $250 (~600% upside) which agrees with Kuppy and Cannell Capital’s targets as well. This is with conservative assumptions as well: 5% annualized print subscriber and advertising decline, 1.5% visitor capture (2021 numbers), modest digital advertising monetization, return to normal EBITDA margins, and common sense deleveraging. Use any other valuation technique and you’ll likely reach similar results.
Now it’s time to talk about the risks. Cannell Capital has a list of them in their Aug. 21 13F and most of them seem trivial or manageable at worst, but the Achilles heel is poor management. LEE’s executive team and board is saturated with old dudes without digital media and advertising experience. There’s a sense of lethargy throughout the company – they are slow to strip costs, respond to a hostile takeover bid (more on that later), and fix old UI on their websites. The board and management need an injection of fresh, young talent. I’m hoping that Cannell Capital, as an activist fund, can induce this change. If not, then we’ll just have to sit and hope that management executes.
I feel that institutional ownership is a strong plus for LEE and wanted to sit on that for a minute. Cannell Capital and Praetorian Capital (Kuppy) are the two largest shareholders and together own 15% of the company. Cannell and Kuppy both believe the stock is worth $250+ and publicly express their bullishness and price target in their 13D/F. Kuppy’s core investment themes are currently oil, uranium, newspapers, and US real estate – anyone reading this probably knows I’m obsessed with uranium. One of Cannell’s largest positions is Sandridge which is awesome because I’ve followed the thesis there and know it’s consistent with my investment philosophy. My point is that the people investing in LEE seem to think the same way about markets as I do, which makes me more comfortable about taking a position.
If you read all this and did a bit of research on LEE, you definitely saw some news about Alden’s takeover bid which I haven’t really addressed at all in this post. I don’t really feel like researching or writing about it right now, so I’ll catch up on it in a later post.
Looks like the market is missing a great opportunity in LEE – it’s definitely worth researching more and potentially building a position in!