Journal Register Company's Conference Call

Journal Register Company (JRC) is a $96 million market cap newspaper publisher that owns 22 daily newspapers "strategically clustered in six geographic areas: Greater Philadelphia, Michigan, Connecticut, Greater Cleveland, and the Capital-Saratoga and Mid-Hudson regions of New York."

JRC caught my eye as a potential short for three reasons: dying business model (newspapers), dying distribution areas (the Rust Belt and especially Detroit), and troublesome financial metrics (high leverage).

The company has net tangible assets of negative $636 million, thanks to $650 million in long term debt and $726 million in goodwill from a string of acquisitions that don't seem to be paying off.

They were recently able to dump two daily community newspapers and five non-daily publications in New England on GateHouse Media for $70 million. The total daily circulation as of December 31, 2006 for the New England cluster was 56,779; a sales price of $1232/daily copy.

JRC presently has 559,000 daily circulation across all clusters, of which 132,992 is in the Michigan cluster. Assuming that all of the clusters could be sold for the same price/daily copy as the New England cluster would value the remaining clusters at $689M. That is below the current enterprise value of $743M.

On the call, the head of the Michigan operations volunteered that the Michigan economy is expected to improve in the 2nd half of 2008 and that this turnaround is "worth waiting for."

I wasn't the only one wondering just who is expecting a turnaround in Detroit, and when questioned about the optimism, the reason given was that "state leaders" are saying there will be a "turn."

I'm also not the only one who thinks that promising results in the second half of next year is just a less-embarrassing way of saying "I don't know."

When another analyst asked what will happen if Michigan doesn't "turn," the man in charge of the Michigan cluster said that it's "way too soon to be thinking about what to do" if Michigan doesn't turn around.

Keep in mind that the Michigan cluster is principally in the environs of Detroit, the city whose population peaked in 1950 at 1.850 million and is now around 900,000.

As Vinny Mattone, quoted in When Genius Failed, said about Long Term Capital Management,
"When you're down by half, people figure you can go down all the way. They're going to push the market against you. They're not going to roll your trades. You're finished."

Or, perhaps even more aptly, a cancer that causes a patient to lose the majority of their weight is inevitably fatal.

The mechanism for this is in a city is a kind of positive feedback loop: as factories and jobs disappear, so do people, and the city's tax revenue base contracts. This tax loss leads to neglect of infrastructure and higher tax rates, motivating more people and businesses to leave.

Also, the people, businesses, and institutions that are left in Detroit are negatively selected to be those that couldn't figure out how to leave. It's difficult to imagine them turning the ship around, especially since the state government just passed tax increases.

[If you have lingering optimism, do a Google search for "Detroit ruins" and see how the city is reverting to wilderness. Property owners default and the properties get quit-claimed from government agency to agency on down to the city, which demolishes the buildings. They plow the bricks and debris into the basement before filling it in with dirt - the land development equivalent of salting the earth.]

I discuss Detroit in such detail because it shows that management must be delusional or just biding their time if they believe it's "way too soon" to start planning what to do if Detroit enters its 58th year of decline.

You might think that the Michigan cluster was a legacy from a more promising time, but the boondoggle (the former 21st Century Newspaper group) was actually bought by the Company in 2004 for $415m. That was a total cost of $3,000 per paid daily subscriber. They sunk a further $23m in cap-ex into the four daily papers and 87 weeklies.

For the past several quarters, management has reported their advertising sales declines both with and without Michigan, because it is such a drag on revenue and profitability.

Speaking of sales numbers from management; they will no longer provide monthly revenue reports. Nor are they giving any guidance. Also, the dividend is being suspended.

If I was an activist investor, I would try to get management to sell the Michigan papers. It just seems like loss aversion to keep hanging on to them and deny the decline of Detroit.