The Bull Case for Media General (MEG)

Media General Class A (MEG) shares were purchased today. It’s a full position in our 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.

Media 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