Shares of Media General (MEG) have declined by about 28% year-to-date. At the current price of $27.2 the stock is trading at almost a 10 year low. The publishing and media business has suffered dramatic declines in advertising revenue as a result of the internet. Classified advertising has increasingly migrated to the online space causing several companies in this industry to lose their bread-and-butter earnings.While everything looks like gloom and doom, Media General has created a dominant franchise controlling dailies, television, and online properties in the S.Eastern United States, with Tampa being one of their strongholds.
In addition, in the Florida region the company has some dominant Spanish dailies that generate significant advertisement dollars.
Historically, odd numbered years have been trough years in terms of earnings for the company due to the absence of political advertising and the Olympics. While even years have contributed toward peak earnings. As such, 2007 is shaping up to be one of the worst years for the company. However, with the US Presidential Elections and the Beijing Olympics in 2008, the company should generate significant advertisement dollars.
In 2006 the company divested its CBS stations and acquired 4 NBC stations. This acquisition positions them very well for the 2008 Presidential elections and the Beijing Olympics. These stations are located in key battleground states such as Ohio, N.Carolina, and Virginia where signficant advertisement dollars will be spent. With NBC owning the broadcasting rights for the Olympics additional advertisement dollars will be garnered from these stations.
While the company has taken on a huge debt burden of approximately $900 million about 5X EBITDA, I believe that they will reduce their capex in 2008, potentially divest their interest in SP Newsprint, and generate about $100 mln in free cash flow in 2008.
Over the next two years they should be able to reduce their debt burden by at least $150 to $200 million providing for a proportional expansion in equity.
At the current depressed valuation levels, Media General has considerable upside of about 50% to 80%. With book value of about $32, there is considerable margin-of-safety in the investment.
Catalyst: 2008 Presidential Elections, Beijing Olympics
