IS Fairfax Media a dog? Seems to be barking...

I was running the ruler over FairFax Media the other day...was thinking about throwing some money at it as it is certainly trading at low levels. But when looking at stocks that have been reduced in value, you need to see whether the stock is undervalued or whether there are legitimate reasons for the decrease.

In the case of FXJ, it seems it might be the later.

Looking over the 2012 annual report, I just can't see many redeeming features. Intangible assets are still sky high (even after massive impairments in 2012) making up over 62% of total assets and 120% of net assets...meaning effectively it's book value is negative.

Even with the massive losses over the last year, it still is paying out a 3 cent dividend meaning $70 million is taken out of the accounts each year that could be spent on...oh well, you know, positive NPV projects that might increase value. Without a dividend cut there won't be be increase in the share price.

I calculated the cost of capital as around 15% so effectively the company needs to earn around $300 million a year to be economically profitable (based on net assets of 2 billion)...not even close to that at the moment. So those net assets will be only going one way....down.

Could the problem be management? Well it has been in the digital media realm for the last few years but only recently appointed a CIO. Not a good sign. Directors have good skills in retail, Investment Banking, even fast food but skills in digital media (or media in general) are thin on the ground. They all seem to have a lot on their plate as well...lots of other chairmanships/directorships to keep them occupied.

Then there are the future plans. Paywalls on media websites are a great idea, but the problem with a politically left leaning website is that the left never want to pay for anything. They believe that it is their right to access free news so I don't see them subscribing in any great numbers. The only website with a paywall currently in the Fairfax realm is the AFR (a rightish business style website), and while profitable, it has a pretty low profit margin (i.e around 5%) . So these paywalls are not going to bring in the big dollars...
Advertising is picking up, but again, the margins are not high on digital ads.

The only thing keeping fairfax alive is Regional media....bringing in 26% of revenue, but over 46% of EBIT. Should be a source of focus instead of hitting the web.

The one pece of good news that I can see is the company is not close to hitting it's credit limits. While in 2012, it came close....(I calculated the interest coverage ratio to be 2.51 at one stage.....), based on estimates of 2013 earnings, it's probably going to be around 4 now (after the sale of Trade Me)

So how to make it profitable? I think only sale to private equity (who might be able to reduce the intangibles and remove the dividends without shareholder complaint) might be the real way of fixing the issue. Shades of Billabong in Fairfax current predicament to me.

Disclaimer: Not a recommendation to invest/not invest in FairFax Media. See your financial advisor etc