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Lee Enterprises: Industry-Leading Free Cash Flow Margins

Jordi Fierlings profile picture
Jordi Fierlings


  • The free cash flow margin of Lee Enterprises is industry-leading and will enable the company to pay down debt aggressively.
  • Strong growth in the number of digital subscribers will allow Lee to capitalise on the synergies of its digital newspaper platform.
  • Lee is trading at a discount to peers despite being a best-in-class operator.

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Online news on a smartphone and laptop, Woman reading news or articles in a mobile phone screen application at home. Newspaper and portal on internet.
Photo by oatawa/iStock via Getty Images

This article was written by

Jordi Fierlings profile picture
Investor from Amsterdam, The Netherlands. Managing Partner of the Fierlings Partnership. I look at pieces of businesses that have strong free cash flow capabilities (at a reasonable price), are undervalued based on their balance sheet, or in which a special situation creates a (temporary) divergence from intrinsic value. I would say that my average holding period is one year plus+, not taking into account special situations and/or merger arbitrage. Finding ideas in the Mergent Moody's Industrial Manual. Like to read and to talk about stocks.

Analyst’s Disclosure: I am/we are long LEE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (22)

Carlo Cannell filed a SEC filing last night with a letter to shake up BOD. He sees with the value of LEE at $250 in 2025 with the right management team in place. He calls for a refresh of the BOD.
Jordi Fierlings profile picture
@D. Barrett Thank you for pointing the filing out to me. And indeed Cannell (6.84% holder) arrives at a $250 price target (in 2025) under their most optimistic assumptions.

A few quick remarks:
- The 2025 revenue and total digital subscription assumptions are aggressive.
- Although aggressive, under the right leadership these assumptions should be within reach.
- I fundamentally disagree with Cannell's valuation rationale. Conducting a sum of the parts analysis simply does not work for a business that in part owes its high margins and strategic rationale from the cooperation between the digital- and news generating parts of the firm (synergies). Selling them off individually, what a SOTP analysis in essence implies, would kill Lee's strategic rationale.
- The main part of the $250 price target consist of a value that Cannell attributes to each digital subscriber (in 2025), an interesting way to look at things (positively interesting ;). $1285 of equity value for a subscriber that pays about $7 a month seems a bit far off, but not too crazy. What we need from management to make a more inclusive assessment of this value is 1) the churn rate of existing digital subscribers and 2) the revenue per digital subscriber derived from other sources such as advertisement. Management can make it even simpler by providing us with their own assessment of value per digital subscriber.
- Even if ones makes less aggressive assumptions, lets say $650 of equity value per subscriber, Lee's equity value would still be a lot higher than today's Mcap.
- It is obvious that there is a huge discrepancy between Lee's intrinsic value and current Mcap, and I therefore applaud Cannell's efforts to help to reduce that gap. We as Lee holders need all the help that we can get to get Lee on the radar of as many investors as possible and as such, initiatives such as this one by Cannell can only help us.
Thomas Richmond profile picture
Appreciated this write-up Jordi! Welcome to Seeking Alpha!
Thomas Richmond profile picture
@Thomas Richmond 1 Question. Why did Berkshire sell off their newspaper assets? The Buffalo News was a company that Buffett loved for its regional moat, and it seems they still have that kind of moat to some extent. So why did Buffett sell?

Perhaps he's not up for the "digital transformation" that the newspaper industry appears to be undergoing. He does appreciate a good business in an unchanging industry. So that could be a reason why.

Would love to hear your thoughts on that; again really appreciated your article and welcome to SA!
Thomas Richmond profile picture
@Thomas Richmond Now I think I get it - Berkshire wrote the debt at a 9% interest rate. They probably sold for a fair price, then will make great returns off the debt as well - where else would you get a 9% yield today?
Roojoo Capital profile picture
@Thomas Richmond There were also quite significant synergies (BH assets were earnings much lower margins) and the digital transformation requires scale.
Hey Jordi and everyone else! Any new thoughts on this?
@Even Hoem Humberset

Still the cheapest of the two local media plays however, large investor reduced position and the volume has been weak after a large move from the lows to over $36. As such it contributed to the sell off despite decent earnings released in early August. The spread between the bid and ask is sometimes over $1, all of which combines for a sell off.
HI Jordi,
I just reread your article and i think its a very good representation of the challenges and opportunities in this investment. Please keep in touch.
Jordi Fierlings profile picture
@philweird More than happy to exchange views.
Jordi, Thanks for the article. LEE has a long history of generating industry leading cash flows and this will not end anytime soon IMO. They will continue to chip away at the debt with their ongoing positive cash flow as they continue to transform to a digital focus. The Q3 release will likely be one to watch as Y/Y revenue will have positive comps. In NYT's earnings release yesterday in their Outlook, they said "Total advertising revenues in the second quarter of 2021 are expected to increase approximately 55 percent to 60 percent compared with the second quarter of 2020". I would postulate that LEE will see similar lifts in Y/Y advertising in the upcoming quarter. LEE is undervalued at $30/share and Mr. Market will eventually correct this undervalued situation. Long LEE.
Jordi Fierlings profile picture
@D. Barrett Thank you for sharing your thoughts here. Interesting viewpoint on the Q3 comps, I think you will prove to be correct on the advertising revenue assumption.
Josh Klein profile picture
Nice article.
Jordi Fierlings profile picture
@Josh Klein Thank you.
Interesting view of the company. What made you think of Lee all the way from Amsterdam?
Roojoo Capital profile picture
@philweird Strangely, LEE has a strong shareholder base in Amsterdam. So does the Dallas Morning News.
Jordi Fierlings profile picture
@philweird It was in the Mergent Industrial Manual that I first came across Lee. And indeed, the Lee shareholder base in Amsterdam is strong ;)
SelbyRoyal profile picture
Great article! You nailed the investment thesis and communicated it very well too. Long LEE!
Jordi Fierlings profile picture
@Alexander_Nelson I appreciate the feedback.
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