Still, regular readers know how much I respect Witmer as a stock picker. And I like having my money invested alongside her firm -- even if I'm hurting in the short term. Here's some of what she says:
At Media General, circulation has been declining by about 1% a year. But advertising revenue per subscriber has been growing by 5%. This growth has been masked by increased newsprint costs, which affected earnings per share by 25 cents in 2005. But they are now under control. On the broadcast-TV side, they are good operators who consistently outperform their competitors in the local markets. Also, with broadcast signals upgrading to digital, the company will be able to broadcast up to six additional stations per market. These TV stations have a lot more bandwidth. Cable stations that want to reach people who can't get cable can buy up some airwaves from these broadcast stations. That's not in my numbers, but it could be significant.
In addition, Media General just acquired four NBC stations, which have upside due to the company's operational capabilities and an NBC recovery. The company also will get $150 million in tax shelters from this acquisition. Like other names in newspaper and TV, Media General's share price has been trounced by concerns about ad dollars shifting to the Internet. The company is capitalizing on this trend with its online enterprise. Online revenues are growing 50% a year, and their top Websites already are profitable.
Do they charge for it?
No. Revenue comes from advertising. Media General would have a much higher stock price if its management allocated capital more judiciously. In the past decade the company has overpaid for newspaper and TV stations instead of repurchasing shares at a tremendous discount to their value. The shares are so cheap right now that this makes up for their lack of financial savvy. Media General is generating a significant amount of free cash, which will be used for capital expenditures and debt repayment in the next few years. In mid-'08, assuming little growth, the company will have good interest coverage and generate free cash flow of just under $6 per share. The stock is $36 and our target is $60 to $70 a share.
I totally agree with her that Media General's management should have been -- and should be now -- buying back its stock.
Management has stated in previous conference calls that it isn't because there aren't that many shares out, that the majority are already held by institutions, with the result being little float.
Yet the company's first obligation should be enhancing value for EXISTING shareholders. Not making it easier for new shareholders to come aboard.
Did I know all this before buying the stock? Yes. But like Witmer says, the stock is so cheap that it's compelling even with management's failure to repurchase shares.
MEG 1-yr chart: