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On Newspaper Stocks (Again)

I’m pessimistic about newspapers. But, that doesn’t mean I’m opposed to buying newspaper stocks. The two most interesting offers from Mr. Market are for Journal Register Company (JRC) and Journal Communications (JRN). Expect a write – up on each soon.

There was a recent piece on Journal Communications over at the Motley Fool. Mr. Simpson thinks JRN should dump its telecom business. I have to agree. In fact, I’d like to go a step further. Why not split the whole thing up? The parts are worth more than the whole. So what if it the company isn’t big? It’s cheap, and the value is in specific local assets that could be run just as well if each business was spun off, or if the different businesses were sold to a few bigger companies. There’s value in JRN. Separating the telecom, TV, radio, and newspaper assets should make that value obvious.

I don’t expect it to happen. For now, the value isn’t obvious. That means it’s a good time to dig into JRN. We might just find a bargain.

On a separate note, most newspaper stocks don’t look insanely cheap if you assume decreasing revenues (which I do). The big names may not be your best bet here.…

On an Interesting Experiment

Today, I’d like to invite you to join me in an interesting experiment. To test the importance of focused investing and both its positive and negative effects, I’ve decided to set up five simulated funds with varying restrictions and see how they perform. There’s a site that allows you to do this sort of thing called Marketocracy. I can’t yet vouch for the service, but it’s free.

I’m more interested in testing my funds’ performance against each other than I am in testing their performance against the markets. The restrictions to be tested are:

1. A Home State Fund (only invests in companies headquartered in one’s home state – mine is NJ)

2. A Top 20 Ideas Fund (spreads assets evenly over one’s top 20 ideas)

3. A Top 100 Ideas Fund (spreads assets evenly over one’s top 100 ideas)

4. An Over 10b Fund (only invests in companies with market caps > $10 billion)

5. An Under 1b Fund (only invests in companies with market caps < $1 billion)

If you want to see examples of these funds, you can view my five creations: Jersey Fund, Sniper Fund, Shotgun Fund, Goliath Fund, and David Fund.

I hope to create five groups on Marketocracy that will allow us to track each type of fund and discuss the difficulties caused by these limitations. All funds should also meet Marketocracy’s compliance rules.

I hope some of you will join me in this experiment. We might learn something.

(I know there are readers outside the U.S., for you the Home State Fund will simply be a Home Country Fund. This isn’t a huge advantage, remember some U.S. readers could be from states like California – so, they’ll have a big economy to play in too.)

You can start by joining any or all of the first three clubs:

Home State Funds

Top 20 Ideas Funds

Top 100 Ideas Funds

(I will set the other two clubs up as soon as Marketocracy gives me permission to go beyond the three club limit).

You need to be invited to join these clubs. Anyone can get an invitation by sending an email to: [email protected] asking for an invite. All readers will be welcomed.

You can also request an invite from inside Marketocracy.

Please tell me what you think of this idea by commenting to this post.…

On Energizer

Energizer Holdings (ENR) owns two of the world’s great brands: Energizer and Schick. Currently, about 70% of the company’s sales come from the battery business and 30% come from the razor and blades business. International sales (from both businesses) account for almost exactly half of all sales.

Energizer’s acquisition of Schick was a steal. In 2003, the company bought Schick – Wilkinson Sword from Pfizer (PFE) for just under $1 billion. In 2005, Schick contributed just under $120 million in profit. This figure does not properly allocate certain shared costs to Schick; but, it does include depreciation expense in excess of maintenance cap ex. Therefore, I believe $125 million is a good estimate of the true economic benefit provided by Schick in 2005. Over the next few years, further margin improvements are likely at Schick; because, between product launches, fewer razors and more blades will be sold. Energizer’s cost of capital for the Schick acquisition was very low. Most of the purchase price has been refinanced as fixed debt carrying an interest rate of less than 5%.

Over the next thirty years, Energizer will become primarily a razor business and primarily an international business. When looking at Energizer today, this fact is difficult to see; however, it is an important truth. Here, I disagree with many other commentators on Energizer’s business. They are far more optimistic about the battery business and far more pessimistic about the razor blade business than I am. We both have access to the same information, so why the disagreement?

I believe Energizer’s highly profitable battery business will slowly wither away. It will remain in some form. Even decades from now, there will still be Energizer batteries sold all over the world. But, how many will be alkaline batteries?

A lot of analysts note that Energizer is particularly well positioned in the markets for lithium and rechargeable batteries, and therefore believe a transition to such batteries would not necessarily spell doom for the little pink bunny. Energizer’s sales of these products has recently been growing at a 20% clip. With so many personal entertainment devices finding their way into consumers’ hands (and under their Christmas tress), it looks like Energizer has a wonderful growth opportunity to exploit.

Unfortunately, that’s not how I see it. Energizer will look to grow its sales of lithium batteries – as it should. But, don’t let the flashy growth fool you. There are two parts to the growth factor equation: growth and profitability.

Lithium batteries are unlikely to be anywhere near as profitable as alkaline batteries. They are more durable and less visible. This is a deadly combination for the likes of Energizer and Duracell. A battery that is bought by the manufacturer rather than the consumer is not something these companies look forward to. There is very little price competition in alkaline batteries. Energizer’s brand name and its distribution system is the key to its ability to charge high prices on alkaline batteries. Those advantages are …