Geoff Gannon July 20, 2007

Interesting Items for Friday, July 20, 2007

Here’s an article discussing Energizer Holdings (ENR) and its acquisition of Playtex Products.

One of the Eight Best Investing Blogs24/7 Wall St.writes about Journal Register (JRC). Long-time readers of this blog may remember I wrote about the company in early 2006. The stock has gotten a lot cheaper since then. However, there are three problems here: 1) Newspapers Generally 2) Journal Register Specifically 3) Journal Register’s Debt.

The first problem is self-explanatory and hasn’t changed since early 2006. The second problem has to do with a bad acquisition made by the company that has changed what the company looks like. Journal Register was once focused on communities with excellent demographics and thus excellent economics for newspaper publishers. Now, not so much. The Michigan properties are a real problem.

Finally, the debt. The biggest problem with the debt is simply that it exists. Journal Register’s market cap makes the company look cheap, but you have to take out the debt as well. Is the company worth much more than its debt load? No. Probably not.

If it weren’t for the debt, Journal Register would actually be an exceptionally easy takeover target in the most anti-takeover of industries. The company doesn’t employ the gimmicky protections most old media companies do.

The combination of a cheap common stock with a heavy debt load will amplify any changes in the value of the enterprise. We’re not far from the point where a 10% change in the intrinsic value of the enterprise would lead to a doubling (or halving) of the value of the common stock.

In that sense, this is a highly speculative stock – for better or worse.

It would also be a good investment if I was sure the value of the enterprise is clearly in excess of the debt. As it is, I think there’s a risk that the value of the enterprise and the value of the debt are too close for comfort. That doesn’t mean I think Journal Register will fail to make its payments any time soon. It just means I don’t think there will be a lot left over for shareholders when you consider I expect the bottom line to decline in the long-run along with the industry.

Of course, it is tempting to take JRC’s market cap and divide by what the company earned in the past. But, on an EV/EBIT basis the business isn’t nearly as cheap as the stock. That’s what I mean when I say this is a speculative stock – you only have to be right or wrong by a small amount in your estimate of the business value to make or lose a lot of money on the stock.

If you’re looking for a stock where leverage will amplify your returns, I still like Hanes Brands (HBI). It’s not as leveraged as Journal Register (though it has plenty of leverage) and it’s a much better business. Hanes was the most interesting spin-off of last year and the stock did well enough but has since cooled off a bit.

Note that I’ve yet to find someone who agrees with me on Hanes. I’m not sure if that’s a good sign or a bad sign.

I loved Hanes at the spin-off price. I still like it at today’s price. It’s probably not ridiculously undervalued as a business, but the debt will amplify the difference that does exist. Last October, I wrote that Hanes was probably worth more like $45 – $65 a share than $25 a share. I still think that’s true; however, the spin-off, plant closings, and debt might obscure the business value for a time. Be patient.