Focus Article: A. H. Belo Corporation (AHC)

A. H. Belo Corporation (AHC) $4.23

The Company:

The newspaper industry has been in sharp decline over the last decade as circulation numbers have dropped precipitously and competition from new media companies has heated up. In a world of 24/7 news, journalists at companies like Business Insider churn out as many as 15 articles a day as described in this entertaining New York Times (NYT) article titled Joe Weisenthal vs. the 24-Hour News Cycle. Can traditional newspapers with their high fixed cost structure and pension liabilities compete in such a dog-eat-dog environment?

I have been tempted several times to buy shares of a couple of newspaper companies including the New York Times (NYT) and A. H. Belo (AHC) but decided against it because in a declining industry, the cheap tend to get cheaper. Just ask any value investor who thought Research In Motion (RIMM) was cheap at $15 or Nokia (NOK) was a steal at $5. In fact our portfolio holding Genworth Financial (GNW) lost nearly half its value over the last couple of months after the company delayed plans for an IPO of its Australian mortgage insurance unit and the CEO quit. The stock dropped from our purchase price of $9.54 to its current price of just $4.88. The fact that book value for Genworth is $30 is irrelevant in this environment.

After adding several GARP (Growth At a Reasonable Price) stocks to our model portfolio, I felt that it was time to consider a value stock after the recent market decline. A. H. Belo showed up on my radar following insider purchases by its CEO Robert Decherd in March at an average price of $4.59. The stock was not only trading below book value but with nearly half its market cap in cash on its balance sheet, it was also trading for just 1.27 times EBITDA. Mr. Decherd picked up an additional 40,000 shares over the last two weeks.

Warren Buffett also appears to see value in the newspaper industry given his purchase of his hometown newspaper The Omaha World Herald last November and the purchase of a group of 63 newspapers owned by Media General (MEG) last Thursday for $142 million. According to the Wall Street Journal (NWSA), “the newspapers will be part of a new unit within Berkshire called the BH Media Group, along with the Omaha World-Herald newspapers.”

Buffett can very well be wrong as seen by his bets on Irish banks where he lost 90% of his investment but given his long history owning the Buffalo News and his stake in the Washington Post (WPO), the Oracle of Omaha probably has more insight into this industry than he did in the Irish banking system.

A. H. Belo Corporation owns and operates four daily newspapers and a diverse group of websites. The company traces its roots back to 1842 and is named in honor of Alfred Horatio Belo, founder of the Dallas Morning News. In February 2008, A. H. Belo was spun off from Belo Corp. (BLC) and became a pure-play newspaper company, while Belo Corp. retained the television stations.

The company’’s newspapers include The Dallas Morning News, The Providence Journal, The Press-Enterprise, and The Denton Record-Chronicle. The Pulitzer prize winning Dallas Morning News generates nearly two thirds of A. H. Belo’s total revenue. A. H. Belo also owns and operates commercial printing , distribution and direct mail service businesses through which it offers commercial printing for national newspapers that require regional printing, such as The Wall Street Journal, The New York Times and USA Today.

Business Statistics & Financials:

The primary investment thesis for A. H. Belo lies in the value of assets it holds on its balance sheet. The company had $55.7 million in cash and no debt as of Q1 2012. A. H. Belo, along with Belo Corp, holds a 6.6% stake in a company called Classified Ventures, which owns several web properties like Cars.com and Apartments.com. The other owners of Classified Ventures include Gannett Co., Inc. (GCI), The McClatchy Company (MNI), Tribune Company, and The Washington Post Company (WPO). Classified Ventures is profitable, has been growing both revenue and earnings at double digit rates and has a strong balance sheet. For the full year 2011, the company earned $72.45 million, up 60% when compared to earnings of $45.25 million in 2010.

Assuming Classified Ventures manages to grow earnings at just 15% in 2012, we get earnings of $83.3 million. Applying a conservative 12 times earnings multiple (the forward P/E for Expedia (EXPE) is 13, Priceline.com (PCLN) is 16 and Zillow (Z) is 57), we get a value of $1 billion for Classified Ventures. A. H. Belo’s stake in Classified Ventures works out to $33 million.

Adding this stake to the $55.7 million in cash that A. H. Belo holds, we get $88.7 million, which is most of A. H. Belo’s current market cap of $92.39 million. The (declining) operating business is free and the substantial real estate assets the company holds are just icing on the cake. Before we start running victory laps, it is important to note that the operating newspaper business is not only declining but is unprofitable on an net income basis. However operating cash flow is positive once you take out high depreciation expenses. The company also had $140 million in unfunded long-term pension liabilities at the end of Q1 2012.

The value of property, plant and equipment is listed as $158.04 million on the balance sheet and is probably below current market value. The breakdown from the Q1 2012 Form 10-Q is given below,

For the year 2011, total revenue was $461.5 million in 2011, a decrease of 5.3 percent compared to the prior year. Advertising revenue, including print and digital revenues, decreased 8.9%, a 300 basis point improvement in the rate of decline compared to the prior year.

For the first quarter of 2012, A. H. Belo Corporation reported a net loss of $0.18 per share compared to a net loss of $0.31 per share in the first quarter of 2011. The company generated $754,000 in operating cash flow and free cash flow was negative to the tune of $1 million.

Competitors:

Insider Buying:

One insider purchased stock on the open market over the last six months as listed below. You can view a list of all insider transactions for A. H. Belo Corporation here.

Risk Factors:

There are several risk factors that could adversely impact an investment in A. H. Belo. Core revenue has already been declining and a potential U.S. recession could significantly impact advertising revenue.

Like the New York Times (NYT), A. H. Belo has two classes of stock and even though management owns less than 5% of the company, they retain voting control through non-public Class B shares that give them 10 votes per share when compared to a single vote for each Class A share.

We may not see a catalyst such as an acquisition or a special dividend funded through the sale of assets for some time to come, essentially leaving us with a dead investment on our hands.

Conclusion:

A. H. Belo is an interesting company where the sum-of-parts valuation appears to be worth a whole lot more than the value the market is currently affording the stock. The company has launched several digital initiatives to prevent the erosion of its core business but is facing an uphill battle. Despite this challenging environment the company has managed to generate positive operating cash flow over the last four quarters. Following the recent drop in the stock price, the dividend yield has spiked higher to 5.7%, providing patient investors with some returns until the company gets acquired or management returns value to shareholders by liquidating some of the substantial real estate assets it holds.