2023-11-17 03:40:41 ET
Summary
- The Daily Journal Corporation is a mini-Berkshire Hathaway operating newspapers in California and Arizona, overseen by Charlie Munger.
- DJCO has a strong investment portfolio, but shares are currently overvalued at over 2.0x P/BVPS.
- Concerns arise with succession planning as Munger recently stepped down as chairman; the author advises investors to be patient and wait for a pullback.
The Daily Journal Corporation (DJCO) is a mini-Berkshire Hathaway operating newspapers in California and Arizona. DJCO's investment portfolio is overseen by Charlie Munger, the famous value investor and Warren Buffett's right hand man.
Historically, DJCO has compounded its book value at an impressive 13.0% annual rate since 1995. However, shares are currently overvalued, trading at over 2.0x P/BVPS. I also have concerns with succession planning at DJCO, as Mr. Munger recently stepped down as the company's chairman. I would wait for better valuations before getting involved in DJCO.
Company Overview
The Daily Journal Corporation ("Daily Journal") is a small-cap media company that publishes newspapers and websites covering California and Arizona, as well as specialized information services such as public notices.
DJCO also owns a subsidiary, Journal Technologies, that provide case management software to courts, prosecutors, public defender offices and other justice agencies in 30 states and internationally.
With only $46.2 million in YTD Q3/F23 revenues and $3.2 million in YTD operating income, the Daily Journal's core operations is normally too small to warrant any significant investor interest (Figure 1).
Figure 1 - DJCO segmented financials (DJCO 10Q report)
However, what the Daily Journal does have is a famous shareholder / director, Charlie Munger.
Investment Portfolio Is The Main Focus
Charlie Munger, the famous value investor and Warren Buffett's right hand man at Berkshire Hathaway ( BRK.B ), first bought the Daily Court Journal newspaper in 1977. Through a series of acquisitions and shrewd investments, Mr. Munger grew the Daily Journal into the public company it is today while serving as the company's Chairman. Recently , Mr. Munger stepped down from his Chairman's role, although he still wields considerable influence at the company, especially with its portfolio of marketable securities.
In most years, the gains and losses on the Journal's portfolio of marketable securities is orders of magnitude larger than the actual operating earnings of the company.
However, if we look at the investment portfolio in detail, we see that the Daily Journal's investment portfolio currently only holds 4 stocks: Wells Fargo ( WFC ), Bank of America ( BAC ), U.S. Bancorp ( USB ), and Alibaba ( BABA ) (Figure 2).
Figure 2 - DJCO latest 13F report (whalewisdom.com)
Furthermore, most of these investments have been held for a long time, with the most recent transaction being the purchase of Alibaba shares in 2021.
Is Charlie Slipping In His Old Age?
Unfortunately, Mr. Munger's most recent purchase of Alibaba shares have been mired in controversy, not only because the shares have declined substantially from where he bought them, but also because he used leverage to buy the shares and was forced to liquidate part of his holdings when Alibaba shares declined further. For someone who has preached that liquor, ladies, and leverage are the only three ways a smart person can go broke, this seemed like quite a contradiction.
However, if we look at the Daily Journal's book value per share ("BVPS") over the years, it is hard to argue with Mr. Munger's investment performance, as he has been able to grow BVPS from $4.68 in March 1995 to $150.29 in the most recent June quarter, or a gain of 32x (Figure 3). The S&P 500 Total Return Index by comparison, has only returned 15x in the same timeframe.
Figure 3 - DJCO BVPS (Seeking Alpha)
Since the Daily Journal's core newspaper business is more or less breakeven, most, if not all of the gains in DJCO's BVPS can be attributed to Mr. Munger's investment prowess (Figure 4).
Figure 4 - DJCO operating income is mostly breakeven (macrotrends.net)
If one invests capital in the market, there will inevitably be winners and losers. So instead of focusing on a single bad trade, Alibaba, investors should look at the totality of DJCO's investment performance and recognize greatness when we see it.
But The Stock Is Overvalued At The Moment
However, that does not mean investors should rush out to buy shares of the Daily Journal. As we mentioned above, the Daily Journal's most recent BVPS was $150.29 compared to its current stock price of $323.75, or a price-to-book valuation of over 2.0x (Figure 5).
Figure 5 - DJCO valuation (Seeking Alpha)
Investors should note that book value may not be the most accurate measure of the value of the Daily Journal's investment portfolio, since the company does have some assets and liabilities that are related to the newspaper business (Figure 6).
Figure 6 - DJCO balance sheet (DJCO 10Q report)
However, for the most part, BVPS reflects the value of DJCO's investment portfolio. If investors are buying DJCO shares at current valuation levels, they are essentially paying $1 for assets that are worth ~$0.50.
Historically, DJCO's P/BVPS valuation has ranged from 1.5x to 4.0x (BVPS is only reported quarterly, so there is a lag effect, especially during market crashes like the COVID panic) (Figure 7).
Figure 7 - DJCO P/BVPS (Seeking Alpha)
For margin of safety, I would advise investors to be patient and wait for valuations to decline towards ~1.5x before buying shares of DJCO.
Risks To Daily Journal
The biggest risk to the Daily Journal is Mr. Munger's age. Mr. Munger is currently 99 years old and recently stepped down as Chairman of the Daily Journal. Going forward, how many more years will Mr. Munger realistically be able to manage DJCO's investment portfolio, and who will be Mr. Munger's successor?
If Mr. Munger were to pass away tomorrow without a suitable investor as a successor, we may see a collapse in DJCO's P/BVPS multiple towards ~1.0x as current investors rush for the exits. Remember, the core newspaper business is roughly breakeven and hence DJCO's premium valuation multiple is attributed to Mr. Munger's aura.
Conclusion
The Daily Journal is a mini-Berkshire Hathaway run by Charlie Munger. Historically, Mr. Munger has been able to compound DJCO's book value at 13.0% p.a. since 1995, beating the S&P 500's 10.0% annual gain.
However, shares are currently expensive, trading at over 2.0x P/BVPS. Furthermore, with Mr. Munger recently stepping down as the company's Chairman and approaching his centenary, I have concerns about the future of the investment process at DJCO.
I would stay on the sidelines and wait for a deep pullback and/or an announcement of a credible successor before getting involved in the company's shares. I rate DJCO a hold .
For further details see:
Daily Journal Corporation: Wait For A Better Entry