Stop The Presses - Lee Enterprises Is Building A Profitable Digital Empire

| About: Lee Enterprises, (LEE)

Summary

LEE’s digital revenue, especially from mobile and subscriptions, is starting to explode.

LEE’s adjusted EPS are starting from a very healthy base.

Things are going so well LEE is already starting to talk about dividends down the road.

There is a massive short position outstanding just itching to get squeezed.

I know, I know. The thought of investing in local newspapers like Lee Enterprises (NYSE:LEE) owns made me cringe at first too, despite Warren Buffett being a fan of this type of business. You're probably already well aware that Warren Buffett has a particular fondness for local newspapers and the semi-monopoly power they hold for the local news that nobody else covers. Still, I figured, once you get used to getting all of your news online, on your tablet, and on your phone you get used to it fast and it's too easy to give up the paper version of a paper. I still believe this to be true; however, LEE is now becoming an exploding digital news play still with all of the semi-monopoly power of having local news like Buffett loves.

Let's get to it.

Exploding digital sales

For LEE, you kind of have to look at it as two companies or segments. You have the print newspapers which are slowly dying but the digital sales that are rapidly expanding. Last quarter, for example, digital sales jumped 17%, digital advertising jumped 13%, mobile advertising revenue leaped 25%, and digital subscription revenue exploded 116%. LEE had been test marketing a digital subscription service in a few select markets and was met with astonishing results. More than 20% of paper subscribers have already made the leap over to digital. Naturally, LEE's plan has been to expand from 14 markets to "the majority" of its markets by the end of the fiscal year - the year end fiscal report is the next report to be issued on Dec. 11. LEE expects a "bulk" increase in digital revenue in the 2015 fiscal year that began in October.

Profitable and growing base

With the overall drag down of print, last quarter revenue dropped 3.2%. However, through a combination of successful cost cutting and higher profitability from digital, adjusted EPS jumped 83% to $0.11. Adjusted EPS has risen significantly each of the last four quarters for a trailing adjusted EPS of $0.65 and operating cash flow multitudes higher than that. Based on the share price at the time of this writing that puts the P/E under 6 with more forward growth expected - seems cheap any way you look at it.

Dividend

LEE has a lot of debt, but that debt is quickly getting paid down due to the really high cash flow coming in. The average debt maturity is seven years, according to the most recent conference call, so as a shareholder you don't have to put much worry into it. CFO Carl Schmidt stated, "We remain committed to aggressive debt reduction and expect to continue to use substantially all of our cash flow towards that end."

However, while the short-term focus for excess cash is debt reduction, CEO Mary Junck stated, "The long-term outlook for the resumption of a dividend is quite good." Things must have been looking quite up during the quarter for Junck to say that.

Short squeeze

Just a quick note here: LEE has a history of trading with some big moves. Keep that in mind for opportunities to possibly profit take then try to buy back cheaper if the opportunities present themselves. There are around 4.6 million shares short of LEE compared to an average volume of 153,000 or a short ratio of 30. If LEE continues to report great earnings, progress, cash flow, and starts moving higher, the move upwards could get exaggerated as shorts throw in the towel and run for cover in a stock that could trade with a crowded covering exit. The short squeeze wild card makes the trade a little more enticing for me.

Risks

The digital subscription is brand new with a lot of early adopters. If LEE fails to execute or if the early adopters end up having a high turnover rate, then long term LEE could be in trouble. However, COO Kevin Mowbray stated during the conference call,

"A key to the good response has been the extensive promotion launched at kick-off across our print and digital platforms through newspaper columns, news stories, blogs, e-mails, videos and websites. Our message has resonated with readers who tell us they understand the indispensable value of our local news, advertising and information we provide … we're just getting started."

Of course, the other biggest risk is if the economy goes into the tank and takes advertising revenue rates with it. With the presidential primaries then national election 1-2 years from now, rates should see some upward movement then but the economy needs to hold up during non-election times.

Conclusion

I like the risk-reward ratio with LEE a lot and I plan to take a position this week. With a P/E under 6 and expected rapid growth from there from digital efforts and even a possible dividend down the road, I believe LEE is going higher. We should see another solid quarter with the report coming up based on adjusted EPS and further jumps in digital revenue.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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