LEE - Lee Enterprises Inc. (LEE) - Leaning Into A Digital Future
Initiating with an Outperform rating. We are initiating coverage of Lee Enterprises with an Outperform rating. We believe the company is maneuvering well into a digital future. Some of the key reasons for this include the company's industry leading cash flow margins, manageable debt, and comprehensive digital strategy. The company's shares also appear to be undervalued, which will be discussed later, as Lee tends to go unnoticed in comparison to some of its large-market focused peers. Cycling towards growth. The newspaper industry has consolidated over recent years and revenues from the traditional print business have declined significantly. As the industry has moved to embrace a digital business model, however, revenue declines are moderating. We believe industry will soon bottom and may begin growing again as a primarily digital business. Investing in Digital. Over the next 18 months the company plans to invest in its Digital revenue growth initiatives, which will constrain margins, but accelerate its transition toward a Digital media company. We expect margins will expand in 2023. In the mean time, the company is expected to generate sizable free cash flow, with free cash flow conversion estimated to be between 30% and 40%. Manageable debt levels. The company has very long term debt, which matures in 2045, and at a favorable average rate of 9%. Lee significantly pared down its debt by roughly $100 million in the past 18 months to $483 million. Notably, there is change of control provisions on the debt. The company is committed to a leverage target of 2.5x cash flow, which it plans to achieve within the next 5 years. Compelling stock valuation. Near current levels, the LEE shares trade at 7.8 times EV to our estimated 2022 EBITDA, compared to a peer group mean of 9.6 times. Our price target of $50 represents a target EV/2022 EBITDA multiple of 8.4 times, roughly a 22% premium to the current price. Moreover, we believe this price target may be conservative given Lee's growing digital businesses, which could lead to upside EBITDA surprises and an upward valuation more in line with its peers that have transitioned to a digital media company. Read More >>