I enjoy reading and researching companies like Detroit Legal News (DTRL). Their Chairman's letters are usually entertaining to read, and the annual reports are short and to the point. Becoming familiar with this company and their business didn't take much time.
The company experienced extraordinary earnings throughout the recession. Now that Michigan is returning to normal their earnings have declined to a level last seen in 2001. This past year the company earned $26 per share, down from $198 a share in 2008.
Here are the company's financial details from 2008 forward:
It's hard to say where the value lies with this company. They seem to have traded in line with earnings in the past. But as earnings fell the stock hasn't declined as much.
The company's book value has declined since 2008, which is usually a cause for concern. The majority of the decline can be traced to paying out a substantial portion of their earnings and excess cash as dividends. In the latest shareholder letter the Chairman stated that they had averaged a 94% earnings payout in the form of a dividend. The company's idle cash has halved since 2008, all of it paid out as dividends.
The effect of dividends on this stock shouldn't be understated. As mentioned above the company is back to their 2001 earning level of $26 per share. The difference is that in 2001 the company's shares were trading for $125, they're $930 now. A shareholder since 2001 would have experienced a seven fold increase in the share price alone. Since 2008 they would have received an additional $753 per share in dividends. Dividends paid since 2001 eclipsed the stock's appreciation.
For those investors who don't believe buying cheap companies works they should look at the results of a Detroit Legal News investment in 2001. At that time the company was trading with a P/E of 5.6 and a P/B of 54%. The investors who made money were the ones who held on, rather than the ones who flipped it for a quick 100% profit.
The company's shares don't appear to be a great value at this price if business conditions don't change. That's not to say that value doesn't exist here, it does, it's mostly hidden value. In the company's 2012 annual report there is a note detailing their operating leases. The beginning of the note is unusual, it discusses a transaction where the company owns a property which is on their books for $100k that is generating $119k per year in lease revenue. Additionally they had an agreement with the lessee where they property could be purchased for $2m if the lessee decided to exercise the option. It becomes even more interesting because after this the company notes they're exploring the sale of this property.
There is also a parking lot property mentioned in the leases section of the notes that might be understated too. The property generates $53k a year in lease revenue. These two properties combined might be valued at $3m or more than their carrying value. If that were true it would increase the company's book value by 14%.
Even if there is a little more value on the balance sheet it doesn't solve the company's biggest issue, their declining revenue.
Detroit Legal News' record earnings were the result of a regulatory actions. A regulation was published concerning the publication of foreclosure notices in 2008/2009. The company benefitted from this until it had run its course. The regulation for publication became optional in 2012 whereas it was mandatory prior. This leaves the company with two options, they can invest in their Inland Press subsidiary, or wait for another recession to hit Michigan.
The company seems to be taking the first approach. They used some of their record earnings to upgrade the Inland Press printing presses. Management expects the new machines to reduce operating costs going forward. They've also increased sales at Inland Press slightly, but not enough to make up for the foreclosure notice loss.
If the economy hits a rough patch again then it's plausible that Michigan could slip again into a depression. If that's the case shareholders of Detroit Legal News could sail through the storm unharmed. But as the economy recovers management is going to need to figure out act two quickly. The company has no debt and appears to be run by very capable managers, I have no doubt they will survive. The issue is will shareholders profit if they were to buy at this level? Personally I'd be a buyer at less than book value, but probably that won't be happening soon.
Disclosure: No position