While it’s true that the newspaper industry is rapidly dying in favor of online delivery, that doesn’t mean companies that have physical newspaper publications are worthless. This is especially true with a company like Daily Newspaper Society (NASDAQ: DJCO) which, under billionaire investor Charlie Munger, has created a large portfolio of investments and has an entirely different line of business that management intends to grow. In fact, given how cheap stocks are today and given the company’s recent financial performance, it’s hard not to view this as a long-term opportunity. But of course, investors buying shares of the company need to understand that much of the company’s fortune will be tied to the performance of the companies it in turn invests in.
A unique game about media and software
At first glance, Daily Journal may seem like little. After all, the business inherited from the company understand ownership of more than 10 newspapers across California and Arizona. Examples of these publications include the Los Angeles Daily Journal, San Francisco Daily Journal, Daily Commerce, and Daily Recorder. All of these publications have small subscriber bases. For example, at the end of the company’s 2021 fiscal year, it was reported that the Los Angeles Daily Journal had only 3,600 paying subscribers, while the San Francisco Daily Journal had only 2,100. Naturally, the company generates revenue through annual subscriptions, with the rate charged for The Daily Journals totaling $870 per year. However, a good portion of the revenue associated with these publications comes from advertising and other activities.
However, when you dig deeper, you find that the company has another set of operations. The unit under which this is included is called Journal Technologies. Through it, the Company provides case management software and related services to courts and other judicial bodies. An example of this would be services like eCourt, eProsecutor, eDefender and eProbation, which are browser-based case processing systems that help analyze relevant forensic data, store and organize business rules, create job waiting, and more. Another offering, called eFile, is a browser-based interface that allows lawyers and the general public to electronically file documents with the courts. And ePayIt helps facilitate online payment for traffic quotes. In its entirety, the company’s Journal Technologies segment accounted for 69.8% of the company’s revenue last year and 79.4% of its profit. This left the remaining 30.2% of revenue and 20.6% of profit attributable to its legacy operations.
In recent years, the Daily Journal’s fundamental performance has generally improved. Although revenues were a bit lumpy, they grew from $41.4 million in 2017 to $49.9 million in 2020 before dropping to $49.4 million last year. Unsurprisingly, revenue associated with its legacy operations declined from $17.6 million to $14.9 million over the same period. Meanwhile, the Journal Technologies segment has grown, with sales growing from $23.8 million in 2017 to $34.5 million last year. In particular, the license and maintenance fees associated with the aforementioned segment have increased well, from $16 million in 2017 to $21 million last year.
During the same period, the company’s profitability improved. Although I would urge investors not to consider net income as a measure of profitability. Indeed, a significant portion of the company’s book value is in the form of publicly traded securities. And as appropriate, the company recognizes unrealized capital gains on marketable securities, as well as unrealized losses on them, as a line item in the income statement. Instead, we should use something like operating cash flow. This has improved in each of the past five years, going from a negative $2.7 million in 2017 to a positive $3.3 million last year. Meanwhile, the company’s EBITDA went from a negative $6.6 million to a positive $4.5 million over the same period.
For the company’s first quarter of fiscal 2022, we can see that it reported revenue of $11.5 million. This compares favorably to the $10.4 million generated a year earlier. Operating cash flow went from negative $2.8 million to positive $0.3 million, while EBITDA doubled from $0.3 million to zero $.6 million.
Looking at these numbers, you might initially think that the company’s stock is significantly overvalued. After all, at the time of this writing, the company has a market capitalization of $354.9 million. However, what some investors may overlook is the fact that the company has a huge portfolio of publicly traded stocks. Examples of major holdings include Wells Fargo (WFC), Alibaba Group (BABA), and Bank of America (BAC). Naturally, this image changes from time to time. In the latest filing, for example, the company said it owns 300,000 shares of Alibaba. That compares to the 602,060 shares the company filed earlier. Factoring the value of those shares into the equation, adding the cash and subtracting the company’s debt, we find that it has cash and cash equivalents in excess of debt in the amount of $339.6 million. This effectively reduces the company’s enterprise value to just $15.3 million.
This presents us with both a positive attribute of the company that is pretty much unique to it, as well as a negative attribute. On the positive side, this makes stocks much more attractive. In theory, the business is significantly less risky due to the excess capital it has. On top of that, stocks look pretty cheap at current levels. Using the data we have from the company’s first quarter of fiscal year 2022 and comparing it to the profitability achieved in 2021, we can see that stocks are trading at a multiple of enterprise value versus flows. operating cash flow of 4.6. Meanwhile, the company’s EV/EBITDA multiple is even lower at 3.4. Of course, if the value of the company’s portfolio changes drastically, this can significantly change the situation. For example, if you reduce the value of excess cash and cash equivalents available to the business by just 20%, that would bring those multiples to 25.2 and 18.5, respectively. This would take the business from being cheap to being quite expensive quite quickly.
If you were to list some of the most interesting companies on the market today, I would find it surprising that you would not list Daily Journal as one of them. Yes, the newspaper part of the business, despite having an online element, will continue to struggle for the foreseeable future. In fact, it’s probably in a permanent state of decline. But much of Journal Technologies’ business creates real value and has seen growth in recent years. But the real boost is the fact that the company has such a large stock portfolio. This makes stocks quite cheap. Of course, investors buying into the company should carefully monitor the performance of the components of the company’s portfolio. Significant drops in value can make the stock quite expensive quite quickly. But on the other hand, a spike in prices can also make stocks look almost free.