Daily Journal Corporation: Uncertain Portfolio, Post-Munger

seekingalpha06-24

Daily Journal Corporation's portfolio remains largely unchanged since Charlie Munger's passing, aside from sales to repay margin loans.DJCO's operations, which include newspapers and software services...

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these stocks until DJCO offers a real discount.   tadamichi It's been a few years since I took a serious look at Daily Journal Corporation (NASDAQ:DJCO), but after Charlie Munger's death last fall, I have been curious about what's next for his company. I also noticed that DJCO hadn't been covered on Seeking Alpha since that time, just a couple of weeks before Munger passed away. I figured it might be time for me to catch up and to help readers do the same. After doing so, it was clear to me that the current price of the shares likely represents a fair valuation to Hold, taking both the operations and the portfolio as a whole. Business Summary A lawyer before he became an investor, Munger always retained some interest in the field and, starting in the late 80s, began acquiring newspapers that had emphasis on the legal industry. As of today, DJCO owns nine papers from California and one in Arizona. This has been known as the traditional business. These earn revenues from subscriptions and advertisements. The company also has a segment and subsidiary called Journal Technologies, which provides electronic services to legal systems in 30 states, such as filing and sharing case information or paying citations online. This accounted for about 76% of revenues in 2023. Revenues by Segment (2023 Form 10K) Starting in 2009, amid the Great Recession and low entry prices, the earnings of the company were invested in common stocks at the discretion of Munger. Cash Flow History (Seeking Alpha) Seen above, cash flow hasn't always been positive, so the long-term return of DJCO eventually became driven by the performance of its portfolio. Investment Income History (Seeking Alpha) On that note, it's worth pointing out that those operating cash flows also consist of the dividends earned by the portfolio and have often been the difference between whether or not cash flows were positive or negative for that year. Stock Portfolio Questions about the stock portfolio remain important, as it accounts for a substantial majority of the company's assets, near $300M. Q2 2024 Form 10Q With a market cap just over $500M as well, this means the value of DJCO will depend largely on the value of these investments, supplemented by the financial results of their operations. DJCO's Positions (Latest Two Forms 13F) Above shows the latest two disclosures about DJCO's portfolio, the top being January's and the bottom being April's, with January covering the last period of Munger's life and thus his influence on the investments. While there was no change between January and the prior quarter, DJCO has since trimmed all of its positions without reinvesting. Cash Flow Statement (Q2 2024 Form 10Q) The latest cash flow statement shows that this was prompted by a sale of securities to satisfy requirements for their margin account. With the largest trim being in Alibaba (BABA), at over a third, this may reflect the belief of the current managers that it is the least desirable holding. Regarding the margin loan, management noted in the Q2 2024 Form 10Q (pg. 11): The Board has been evaluating ways to ensure the prudent and effective management of these assets in the context of the current market and the needs of the businesses, and the recent sales of a portion of the portfolio and the concurrent paydown of the Company’s margin loan, each as described above, are reflective of that evaluation. Exactly what the Board intends to do with its investment strategy, in the six months of disclosures since Munger's passing, has not been specified. In their Q2 2024 Form 10Q (pg. 22), they did hint at it, though: The Company believes that it will be able to fund its operations for the foreseeable future through its cash flows from operations and its current working capital and expects that any such cash flows will be invested in its businesses. The Company may or may not have the ability to borrow additional amounts against its marketable securities and, among other possibilities, it may be required to consider selling some of those securities to generate cash if needed to fund ongoing operations. They go on to say: The Company is not a smaller version of Berkshire Hathaway Inc. The Company’s goal is simply to continue to develop a successful and profitable software business, while continuing to enjoy the benefit of its Traditional Business for as long as possible. As such, it seems that the plan going forward is not one of stockpicking or any kind of portfolio management that we might consider \"adept.\" That is to say, I believe they will not attempt to emulate Munger with regards to the portfolio. Rather, it's going to be about the operations of \"DJCO proper.\" For practical purposes, this strikes me as an expense ratio for a Charlie Munger ETF, only without Charlie Munger.   Author's display of 13F data Above, based on the number of shares owned (as of the latest 13F) and recent closing prices, the current portfolio is about 89% invested in the positions of Bank of America (BAC) and Wells Fargo (WFC). When the next 13F comes out in July, this should provide more clarity on the current portfolio, but I have little reason to believe it will be fundamentally changed. Outlook for Operations DJCO proper isn't necessarily a bad business, but I don't exactly see a runway for growth or very impressive earnings going forward. Journal Technologies is the bulk of revenues, and they mention in their SEC filings that almost all of their customers there are government agencies. While the government is often a good customer, as they tend to be able to pay, this also means there aren't many markets to penetrate or capture with the current model. For the traditional business, it is possible that DJCO could engage in M&A of newspapers. Again, with its focus on the legal system and that niche of publishing, I'm not sure an exciting runway for growth exists here. Munger, who practiced and lived in California, appears to have acquired papers familiar to him personally, and his personal touch is therefore lost in \"paper-picking\" as well as stockpicking. The company will need to disclose a willingness to venture out of law and the courts before there's reason to get excited. Conclusion Daily Journal's portfolio has not seen much change since the loss of Munger, and so the Board has guided for focusing on and investing in the underlying media business: its newspapers and software services that cater to the legal system. In recent years, this has not been a meaningful contributor to the financial results of DJCO, and Munger clearly saw better opportunity by investing in the market than the operations (albeit in the context of 2009). With the market cap at around $520M and a portfolio near $300M, the remaining $200M in value suggests something substantive to the underlying operations and/or growth in the portfolio. Given that the operations only tend to generate a few million in cash each year at best, nothing suggests DJCO trades at a discount.  Moreover, with most of the portfolio in two well-known stocks, investors who were previously attracted to the portfolio management would likely find it easier to just buy BAC and WFC directly, assuming they agree these are prudent, attractive choices. For these reasons, DJCO is just a Hold until a new future for the company is articulated or until a better price is offered by Mr. Market.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2445737640"}