Buying Media General

Medial General Class A (MEG/NYSE) shares were purchased today. It’s a full position in the portfolio. The stock closed Monday at $47.05. The company’s shares had recently been trading above $50 until it announced earnings lower than analysts had been expecting. I’ve been looking at the company for a while, believing it to be undervalued, and decided to take advantage of an even better opportunity created by the drop in share price.

Medial General is a communications company concentrated in the Southeastern US with interests in newspaper publishing (63% of 2004 revenues), broadcast television (36%) and interactive media (1%). The company’s strategy is one of convergence.

Convergence at Media General combines multimedia resources -- print, television, the Internet and, through partnerships, radio -- to serve more people better. Convergence delivers stronger local journalism by sharing newsgathering and reporting resources. By becoming the preferred local provider of news and information, and increasing audience share, convergence drives revenue growth. With the internet, every Media General market is a convergence market. In six markets, Media General has implemented convergence across three media platforms.

The company’s publishing assets include three metropolitan newspapers, The Tampa Tribune, the Richmond Times-Dispatch, and the Winston-Salem Journal; 22 daily community newspapers in Virginia, North Carolina, Florida, Alabama and South Carolina; and more than 100 weekly newspapers and other publications.

The broadcasting assets include 26 network-affiliated TV stations, featuring WFLA, the number-one rated station in Florida’s largest television market. Media General’s stations reach 30 percent of all television households in the Southeast and nearly 8 percent of those in the United States.

The interactive media assets include more than 75 online enterprises that are affiliated with the company’s newspapers and television stations. The company also owns Blockdot, Inc., an advergaming and game development firm known for successful product innovation, and Boxerjam, a multimedia producer of interactive games and puzzles.

Media General is trading near its 52-week low of $47. It’s trading at roughly 1.24 times book value and 1.16 times sales. The P/E is 13.73 and it yields 1.86%. There are roughly 24 million shares outstanding and the market cap is $1.14 billion.

Stated simply, I'm anticipating that the company’s near-term investment spending should result in increased revenue and better operating margins over the long term.

Yet there are risks with this investment -- as with everything I buy. For Media General there are four main risks:

1. The company’s convergence strategy just never works out. Period.
2. The company is vulnerable to an economic slowdown in the Southeastern United States.
3. The Federal Communications Commission could ban “cross-ownership” of media assets, crippling the convergence strategy.
4. The company has two classes of stock, as do most media companies, which may not always be in the best interests of common shareholders. Chairman J. Stewart Bryan III controls Media General.

I’m not particularly concerned by any of those, but they exist. I should add that Chairman Bryan is one of the largest owners of the Class A shares (which I own) as well as holder of 83% of the company's Class B shares. I view his interests being aligned with shareholders.

Also, of the 24 million shares outstanding, more than 80% are owned by institutions. So there isn't a lot of stock out there to buy. Be careful and use limit orders if you chose to buy Media General -- after doing your own due diligence.

UPDATE 8/8/2006: More Media General Class A stock was purchased today at $37.87. The average cost for this position is now $44.76.

Comments

[Earvin Johnson]

MEG - own it. Bought just prior to their most recent guidance unfortunately. I own three newspaper stocks now - gotta own what's cheap right? A little early in the first two is an understatement, but I feel that the death of the newspaper is way overblown and you can never ignore CASH FLOW.

Biggest risk for MEG, as you noted, is the southeast economy and housing market. Tampa especially has been growing leaps and bounds. Their real estate classified section is about 8 sections long.

If you look at the multiples that KRI was bought out at (18x trailing earnings, 12.5x trailing EV/EBITDA, 10.5x forward EV/EBITDA) this group is cheap. Although - there wasn't exactly a long line of suitors bidding up KRI.

I still like the group as a whole and feel like if you bought a basket of them today, you could do pretty well going out 5 years.

[John]

Earvin,

I can't disagree with anything you say.

A couple things I like about MEG. One, they have a lot of small community papers, which might be better than the major dailies. And two, their interactive media is still in its infancy. The timesdispatch.com and TBO.com sites are profitable.

To echo what you say about newspapers as a group, I think this holding will look good a few years down the road.

[Alex]

I'm concerned that Media General is slowly transitioning from a value stock to a failed growth stock. Cutting all those employees may help the bottom line, but it can't do much for the value of the franchise.

I'm short the $20 puts, and if they expire worthless, I'm out. While I think there are valuable assets here, I also think they are slowly losing value.

[John]

Alex: Value stock, failed growth stock...Media General has simply become a very disappointing stock regardless what we call it. This is another stock I felt would be dead money for a while, but gosh it's been a huge decliner.

[Anonymous]

I worked for a MG small daily. Readers hate it and are leaving in droves as the paper is failing to listen to demands for more local news. Competitors are looking at the Danville market as most of the realtors are trying to find alternative advertising sources because of the horrible reputation of the Danville Register and Bee. Reidsville and Eden readers were not happy to lose their "hometown" paper and be absorbed by the Register and Bee so "convergence" is failing as most find the new website difficult to navigate.

The shoddy way MG has treated loyal employees, outsourcing of ads and printing to Lynchburg and now India has rural conservative communities upset. The time is ripe for competition. Add to that two employees have filed EEOC complaints (one male, one female) and other locals have sued the paper - look at the money being wasted on attorneys for things that shouldn't have to be wasted on - like sexual harassment. For more: www.danvilleva.blogspot.com

[Toucalit Benton]

Greetings,

I wonder if you are considering selling this stock.

[John]

@Toucalit: Sure, and I may at some point. But it's money lost at this point either way.