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In the last 2 months, Lee Enterprises (NYSE: LEE) has set new 52-week lows and dropped over 66%. Last year they made $0.71/share after adjustments. You can buy that kind of power for less than $1.25. What gives? April was not a good month for people who own the stock as they watched the valuation drop in a straight line from over $3 to under $1. It makes you wonder: What's changed since March? What has caused the drop?




Since March:

  1. Class B shares have been converted to common.
  2. They reported a losing Q2 due mostly to Easter being April 24th this year and April 4th last year. This poor showing in Q2 put the company between a rock and a hard place --- as their ability to refinance at good terms was compromised by this miss according to the company.
  3. The company has walked away from a refinancing of their debt because the company feels that they will be able to negotiate better terms at some point between now and April 2012. Note that if they are unable to renegotiate debt they are up a creek without a paddle.
  4. The CEO bought 100,000 shares at around $1.06.
  5. The stock dropped like a rock and appears to have stabilized on huge volume around $1.

Key Insights:
Q1 is their strongest quarter. Q2 is their weakest quarter. Q3 and Q4 are somewhere in between. Their fiscal year ends in September. Thus Q1 is Christmas season. The company didn't put out good numbers on their worst quarter and the quarter didn't include the usual inclusion of Easter --- to me this is not a big deal. That said, I am thinking that this year Easter will be included in Q3, which should make Q3 look pretty darn good. Because Q1 wasn't in line with expectations, the stock dropped, short sellers made their profits, and lenders became more unwilling to lend to Lee Enterprises. I think that the company's decision to walk away from the refinancing terms shows poise and competent thinking.

Comparables:
Gannett (NYSE:GCI) is trading around a P/E of 6.5. The McClatchy Company is trading around a P/E of 7. The New York Times Company (NYSE:NYT) is trading around a P/E of 10. Note that these companies don't have the near term (April 2012) bankruptcy/liquidity risks that Lee Enterprises has. It is my opinion that when Lee is able to put these issues behind them, they will trade back along in line with their peer group. That puts Lee Enterprises above $4.

My Forecast:
More online ad revenue. Think about how the market would react if the year-over-year comparables actually start growing? That's what I think is starting to look likely. I've been accumulating shares at these incredible prices. I think that the fears of bankruptcy are overblown. Lee Enterprises has a lot more going for it than the stock price suggests. In the last 26 weeks (6 month equivalent), the company has made $0.39 per share. That and the company is pushing around $100M of free cash flow for a company that has a market valuation of around $50M. Not only that but they have a great track record of paying down debt. They paid off over $100M last year.

Again, I'm screaming here. The price of anything less than $1.25 is ridiculously cheap and in my opinion is forecasting a 80% chance of bankruptcy. I'll take that bet. I'm buying with an expectation of 300% profits somewhere in the next 6-12 months. Frankly, I'd like to see Mary buy even more shares, because I'd like to see her make a lot of money due to the market's inability to understand that walking away from the debt restructuring was a sane thing to do. I am also prepared to buy if Lee Enterprises does start to fall in price. Unfortunately I do not think I will be so lucky as to be able to buy it at lower prices and as such I've been accumulating most of my shares on the offer as the price keeps trending higher.

The Risks:
Perhaps I am wrong. The company has over 20x its market capitalization in debt. The real risk here is that after QE2, interest rates go up and Lee Enterprises is forced to renegotiate their debt at an even higher rate than the rate they walked away from. Yikes! That said, personally I am operating under the mental framework that the entire stock market is overvalued by at least 25%. I expect prices overall to come down as we see the global industrial sector slow down and China begin to crack up. This may affect LEE's price negatively. Another risk is that LEE goes into default on their debt. Perhaps they cannot renegotiate their debt and their business turns south for unforeseen circumstances and shareholders get nothing. Although I find this highly unlikely, it is a possibility.

Satiric Remarks:
Honestly, I came into this not wanting to be long any stocks because I am forecasting that the markets as a whole are going to drop. Unfortunately, the price of Lee Enterprises is too attractive. I've had to learn a lot about a great company. If you know nothing about Lee Enterprises and would like a head start, the best thing to reference is the .pdf document that they passed out at their annual meeting. The second document worth referencing is the company's remarks on why things haven't been going so well. It's my opinion that things aren't as bad as they seem if you're simply investing based on the numbers alone. Historically speaking, LEE hasn't traded at less than $1 for more than 5 months, at which point the return was over 100% if you bought at $1.



Disclosure: I am long LEE.

Source: Why I Bought Lee Enterprises