Lee Enterprises, Incorporated (Nasdaq: Lee) is a media company with exposure to both the traditional print and digital news markets (although it is in the midst of a transition from print-centric to digital-centric). a company). LEE also generates revenue through advertising and marketing services. The company is known for its news, digital content, and marketing expertise in America’s home markets.
I’m agnostic about LEE’s prospects but I’ll touch on the good and bad sides of this story.
What would you like?
When you think about the addressable market in the digital space, the sky’s the limit, as last year LEE managed to attract 50 million unique visitors across all of its digital platforms. The goal now is to try to convert the lion’s share of these unique visitors into paying digital subscribers over time.
LEE’s immediate goal is to reach 900,000 digital subscribers within 4 years, and so far, one can have some complaints because execution has been better than expected. LEE was on track to finish this year with 495,000 digital subscribers, but they surpassed this in the third quarter itself, reaching 501,000 subscribers in that time!
It’s not just the absolute milestones that catch the eye; Also note the relentless pace of growth, despite the challenging factors. Towards the end of last year, digital subscriber additions were coming in at a 65% year-over-year growth rate. Despite the high underlying impact, the impressive run rate continues, with subs growing 57% and 59% over the past two quarters. Crucially, the pace of growth has been well ahead of its close peers — the New York Times and Janet — for a long time now (ten quarters in a row, to be more specific).
LEE is not only adding subs, it’s also attracting top dollar from this growing base; In the third quarter, they implemented a 7% increase in subscription rates for their digital-only base (this follows a 20% increase in the middle of the second quarter). You can’t grow your user base 50%+ and perform hikes of 7-25% unless you have a subscription package worth subscribing to. In recent times, LEE has been pushing forward dynamic video and graphics content while deepening its presence through new channels like apps, podcasts, etc. Through 2026, subscription-related digital revenue is likely to grow at a much higher pace of 29% over the same period.
Given the company’s rapid pace of growth in the digital space, I think its valuations are somewhat misplaced. On a forward EV/EBITDA basis, the stock is only trading at a multiple of 6.4x; That’s a whopping 35% discount to the average multiple of comparable companies in the field.
Additionally, if you’re looking for opportunities to rotate within the small cap’s wide space, I think LEE should be on your watchlist; The relative strength ratio that measures LEE’s position relative to other small caps currently trading is 2.7 times lower than the midpoint of its decade-long range.
In the short term, the most important catalyst will likely be fiscal year results that could be released over the next couple of weeks (Yahoo Finance pulled it off Nov. 30, but there’s no official confirmation on Lee’s site). It should be noted that the consensus is currently a bit cautious, with an expected fiscal year EBITDA of $95.4 million. That’s closer to the lower end of management’s guidance of $95-98 million, and there’s an outside chance we’ll see some upward adjustment to that number. On its third quarter call, management highlighted some cost-cutting measures it has taken that could generate $20 million in cost reductions for the last two quarters of the current fiscal year.
Crucially, I think we could see some improvements on the cash flow front, which isn’t quite the case as of the first nine months of 2022. Last year, through the first nine months, LEE generated approximately 43 million operating cash flow; This year so far, I’ve only managed to generate less than a million in operating cash! One of the biggest drivers of cash flow this year has been contributions to pensions (that sucked up nearly $14 billion in cash). Their pension plans are fully funded on aggregate, and the company will not have to make any contributions to its pension fund for the rest of 2022. It is imperative that LEE begin to improve cash generation, recently, debt coverage by running cash flows has fallen to its lowest level decade ago!
Then, while LEE’s printing division will probably handle another quarter of higher newsprint costs, I think things may start to wind down as we close out the year. Reports indicate that a few newsprint producers are likely to restart previously idle machines, which would have smoothed out the supply/demand adverse situation. After nine consecutive months of gains, the newsprint PPI appears to have flattened in October and could move from here.
What do you not like?
LEE peers Garnett and NYT called weak ad market conditions. Under normal circumstances, one would have felt fairly optimistic about the current December quarter at LEE, as it typically sees an uptick in holiday-related and seasonal advertising, but this year, it can be a bit difficult to anticipate those trends given how Advertising budgets have been affected by the recession. In fact, the New York Times expects digital ad revenue to drop 10% in the December quarter.
I also suspect LEE may have missed a trick by not reaching an acquisition agreement with hedge fund Alden Global Capital last year, who were willing to offer $140 million, or $24 per share; That price would have represented a premium of about 34% over current levels, and given the state of the announcement, the naysayers may be wondering if the stock will reach those levels anytime soon. Even if you want to talk about the prospects for digital strategy, note that more than 70% of digital revenue, estimated at $435 million in 2026, will still come from digital advertising and marketing (only 30% will come from subscriptions).
In the previous section, I covered how attractive the LEE stock looks compared to other alternatives, but if one pays attention to the price imprints of the chart, I wouldn’t get overly excited at this juncture. We basically have something like a falling wedge pattern, and while investors can always position themselves to exploit a potential breakout above the upper bound of the wedge, I don’t think that is the optimal setup. The preferred option would be to wait for a pullback somewhere closer to the $17 levels (lower wedge) which previously acted as a useful pivot point; The risk return at these levels will look more attractive.