A.H. Belo Corporation (NYSE:AHC) is a Dallas-based newspaper company whose flagship product “The Dallas Morning News” has been in circulation since 1885. The company knows that paper newspapers are a dying business is attempting to undergo a transformation into a sustainably profitable digital news enterprise. There is no easy path to this goal, but due to A.H. Belo’s prudent management of the balance sheet, it might have a chance.
The balance sheet is genuinely exceptional, and management is not lying when they say it’s a significant advantage over its competitors. The company currently has 43.17 million in cash and has 22.77 million coming via proceeds for selling its former headquarters in 2019. The company carries no debt to speak of and can sustain for years, even if it remains unprofitable. When you consider the company is only trading at 30 million in market cap, there seems to be a very compelling liquidation case. However, management appears to have no interest in going down the liquidation road for the foreseeable future.
Digital Subscriber growth
With a strong balance sheet, management will get its chance to execute on its long-term vision of becoming a digital news enterprise. The company showcased 34.5% YoY growth on digital subscription revenue and a 39% increase in paid digital-only subscriptions during Q3, which is encouraging. The subscriber growth in the graph below shows a healthy uptrend, with Covid-19 only accelerating it further. As we advance, I believe this will be the most important metrics to follow. The company actively reports these numbers on their investor relation page, and I urge any potential investor in A.H. Belo to check on them quarterly.
A.H. Belo has a massive growing addressable market in Dallas, and with increased scrutiny of the media outlets we receive our information, local news may be more critical than ever. Dallas is the 9th largest city in the United States, and judging by the graph below, it’s only attracting more working-class Americans. A.H. Belo should be glad to have its home in one of the United State’s premier markets, and it should serve as an excellent environment to grow the local news business.
Image Source: Dallas, Texas Population 2020
It’s no secret that newspapers as a business face significant headwinds that have deteriorated profitability for decades. Pick up an A.H. Belo income statement or one of its competitors, and you’ll see YoY revenue declines in every category. While A.H below has been able to adapt its cost base reducing employee compensation 15% YoY, they cannot continue to fire people in response to revenue declines in perpetuity. Yes, the growth in digital revenue we pointed out is encouraging, but circulation is still down 4% for the year. It seems entirely possible that the increase in digital subscriptions is strictly customers switching their form of distribution in response to Covid-19.
The companies rock-solid balance sheet will continue to deteriorate as the company attempts to reach profitability, and the dividend seems both excessive and unnecessary. The dividend looks like an attempt by management to appease the mob of investors who want them to liquidate. The crowd it wants to appease includes Dolphin Limited Partnership, which owns 4.9% of the class A common stock. Dolphin Limited partnership recently sent a letter to the CEO asking A.H. Belo to return the 22.77 million note receivable to shareholders via a special dividend of 1.06/share, increasing the pressure to return capital to shareholders. The dividend currently yields 11% and costs >3 million annually to maintain, almost all of which will come from their cash pile. Each payment weakens A.H. Belo’s balance sheet, which is the most significant advantage it has over its predecessors who tried to transition into profitability as well.
A.H. Belo is practically a family business for Robert Decherd (CEO). His great grandfather founded the company, and his father ran the business before him. Due to this, Decherd has a vested interest in keeping the company alive even if significant headwinds present themselves. As pointed out before, the liquidation of the company would be highly profitable for shareholders. 43mil in cash + 22mil in the upcoming note and a wholly-owned printing facility could see shareholders easily yield a double from current valuation. Liquidation has been brought up to Decherd before, and he has stated the company remains committed to its long-term plans. A real possibility is that A.H. Belo can’t transform to profitability, and Decherd drives the company until the wheels come off.
A.H. Belo has the potential to offer significant appreciation if they are successful in their transformation to a digital media enterprise. There are numerous examples of newspapers trying to obtain profitability only to have failed, one of the most recent being McClatchy, a titan in the industry. Thankfully, A.H. Belo has one thing on its side that those who perished did not, time. Since A.H. Belo has no debt, management will get a reasonable shot at transforming the business over the next decade. As we have seen with numerous other digital transformations plays, Amazon & Netflix being the biggest, a successful digital transformation will be highly lucrative to shareholders. There is also a possibility that the CEO realizes the road to profitability is no longer possible and entertains a liquidation of the company’s assets. If this were the case, I believe the company could return positive returns based on today’s share price even if the liquidation occurred as far out as 2024.
On the flip side, we have a business whose entire existence at this point is due to its balance sheet. Fundamental deterioration has been happening for years, and there’s no special spell to stop the bleeding anytime soon. While the 11% dividend is probably sustainable for now, there is an argument to be made that the dividend is simply management liquidating a portion of your stock early. To top it all off, we have an owner who seems to be more than willing to run this car until the wheels fall off.
My recommendation to those interested in investing is to keep it small, pay attention to any earnings commentary on liquidation, and pay close attention to digital subscribers. While the company is attractive at this valuation, the risks are substantial and will continue to be for the foreseeable future. Moving forward, we should begin to get a much clearer picture of where the company is heading. As I see it, there are three distinct possibilities:
If it happens to be one or two, shareholders can expect to double their capital and then some. I believe it deserves a spot on the watchlist due to those two distinct possibilities, but I’m not convinced enough at this point to put it in the portfolio.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any 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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