Daily Journal Corporation: Attractively Priced If Its Investments Pay Off

May 17, 2022 11:25 AM ETDaily Journal Corporation (DJCO)BABA, BAC, WFC6 Comments

Summary

  • Daily Journal Corporation has done well to grow its new core business in recent years, creating real value for its investors.
  • But the real value lies in the fact that the business has a significant portfolio of securities on its books.
  • Factoring this into the equation, shares look quite cheap, but this could change based on investment performance.
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Though it is true that the newspaper industry is quickly dying in favor of online circulation, this does not mean that companies that have physical newspaper publications are without value. This is especially true with a company like Daily Journal Corporation (NASDAQ:DJCO) which, under the guidance of billionaire investor Charlie Munger, has created a significant portfolio of investments and that has an entirely different line of business that management is intent on growing. In fact, given how cheap shares are today, and when considering the recent financial performance of the business, it's difficult not to like this as a long-term opportunity. But of course, investors who buy stock in the firm should understand that much of the company's own fortunes will be tethered to the performance of the companies it, in turn, invests in.

A unique play on media and software

At first glance, Daily Journal may not seem like much. After all, the company's legacy business includes ownership over 10 newspapers spread across California and in Arizona. Examples of these publications include the Los Angeles Daily Journal, the San Francisco Daily Journal, the Daily Commerce, and The Daily Recorder. All of these publications have small subscriber bases. For instance, as of the end of the company's 2021 fiscal year, it said that the Los Angeles Daily Journal had only 3,600 paid subscribers, while the San Francisco Daily Journal had a modest 2,100. Naturally, the company does generate revenue off of annual subscriptions, with the rate charged for The Daily Journals totaling $870 per year. However, a good portion of the revenue associated with these publications comes from advertising and other activities.

When you dig deeper though, you find that the company does have another set of operations. The unit this is included under is called Journal Technologies. Through it, the company provides case management software and related services to courts and other justice agencies. An example of this would be services like eCourt, eProsecutor, eDefender, and eProbation, which are browser-based case processing systems that help to analyze relevant court data, to store and organize business rules, to create work queues, and more. Another offering, called eFile, is a browser-based interface that allows attorneys and the general public to electronically file documents with courts. And ePayIt helps to facilitate online payment for traffic citations. In its entirety, the Journal Technologies segment of the company made up 69.8% of the firm's revenue last year and 79.4% of its profits. This left the remaining 30.2% of revenue and 20.6% of profits attributable to its legacy operations.

Historical Financials

Author - SEC EDGAR Data

Over the past few years, the fundamental performance for Daily Journal has generally improved. Although revenue has been a bit lumpy, it has grown from $41.4 million in 2017 to $49.9 million in 2020 before dipping to $49.4 million last year. Not surprisingly, revenue associated with its legacy operations has declined, falling from $17.6 million to $14.9 million over the same timeframe. Meanwhile, the Journal Technologies segment has grown, with sales rising from $23.8 million in 2017 to $34.5 million last year. In particular, licensing and maintenance fees associated with the aforementioned segment grew nicely, climbing from $16 million in 2017 to $21 million last year.

Historical Financials

Author - SEC EDGAR Data

Over the same timeframe, profitability for the company has improved. Though I would urge investors not to look at net income as a measure of profitability. This is because a significant portion of the company's book value is in the form of publicly traded securities. And as it should, the company reports unrealized gains on investment securities, as well as unrealized losses on them, as an income statement item. Instead, we should use something like operating cash flow. This has improved in each of the past five years, climbing from a negative $2.7 million in 2017 to a positive $3.3 million last year. Meanwhile, EBITDA for the company went from a negative $6.6 million to a positive $4.5 million over the same timeframe.

For the first quarter of the company's 2022 fiscal year, we can see that it reported revenue of $11.5 million. This compares favorably to the $10.4 million generated one year earlier. Operating cash flow went from a negative $2.8 million to a positive $0.3 million, while EBITDA doubled from $0.3 million to $0.6 million

Historical Financials

Author - SEC EDGAR Data

Looking at these numbers, you might think initially that shares of the company are drastically overpriced. After all, as of the time of this writing, the firm had a market capitalization of $354.9 million. However, what some investors may overlook is the fact that the company has a tremendous portfolio of publicly traded stocks. Examples of significant holdings include Wells Fargo (WFC), Alibaba Group (BABA), and Bank of America (BAC). Naturally, this picture does change from time to time. In the latest filing, for instance, the company reported ownership of 300,000 shares of Alibaba. That compares to the 602,060 shares the company had one filing earlier. Factoring the value of these stocks into the equation, and adding in cash and subtracting from that the company's debt, we find that it has cash and cash equivalents in excess of debt in the amount of $339.6 million. This effectively reduces the enterprise value of the company to just $15.3 million.

This presents us with both a positive attribute of the company that is pretty much unique to it, as well as a negative attribute. On the positive side, it makes shares far more attractive. In theory, the company is significantly less risky because of the surplus of capital that it has. On top of this, shares look quite cheap at current levels. Using the data that we have from the first quarter of the company's 2022 fiscal year and comparing that with the profitability that had achieved in 2021, we can see that shares are trading at an enterprise value to operating cash flow multiple of 4.6. Meanwhile, the EV to EBITDA multiple of the company is even lower at 3.4. Of course, if the value of the company's portfolio changes drastically, then this can change the picture significantly. As an example, if you reduce the value of the excess cash and cash equivalents the company has on hand by just 20%, this would take these multiples up to 25.2 and 18.5, respectively. That would take the company from being cheap to being quite pricey rather quickly.

Takeaway

If you were to make a list of some of the most interesting companies on the market today, I would find it surprising if you didn't list Daily Journal as one of them. Yes, the newspaper portion of the company, despite the fact that there is an online element to it, will continue to struggle for the foreseeable future. In fact, it probably is in a state of permanent decline. But the larger Journal Technologies portion of the business does create real value and has shown growth in recent years. But the real kicker is the fact that the company has such a large portfolio of securities on hand. This makes shares look quite cheap. Though of course, investors who do buy into the company need to keep a careful watch on how the components of the portfolio the company has performs. Significant declines in value there can make the stock rather pricey rather quickly. But on the other hand, a surge in price can also make shares look almost free.

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This article was written by

Daniel Jones profile picture
24.57K Followers
Robust cash flow analyses of oil and gas companies

Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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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