No. of Recommendations: 19
I follow it and own some. Valuing it is fairly easy - whether it is a good investment (at these prices) is in the eye of the beholder.
The Daily Journal has three components that one needs to value.
1) The Marketable Securities Portfolio:
There isn't a whole lot of activity in the portfolio these days - so you just have to know what they own and value it in real time. They own six stocks - the tricky part is that two are not disclosed in their 13F-HRs because they are either listed on a foreign exchange (1211.HK or BYD) or they are an ADR that the SEC does not mandate must be included in their 13Fs (TCEHY or TenCent). Note BABA is also an ADR but appears on the SEC list of investments that must be disclosed on 13Fs.
At yesterday's closing prices - I get a real-time value of the portfolio of $416m (million). Using the 10-Q that came out yesterday, I add the cash on hand of $16m, subtract the investment account margin loan of $20m and add something for the future tax liability on the unrealized capital gains. That's $72m - but because DJCO tends to be a long-term holder of their securities, I discount it using the 10-year Treasury yield (i.e, assume 10 year hold). That gets the present value of the tax liability to $47m.
Put it all together and the after-tax, net asset value of DJCO's marketable securities is $366m or $266 per DJCO share.
Of course, I can hear Jim in my ear saying that the market value of the securities is not the intrinsic value & the tax liability should be booked at its immediate disposition value. But this is how I do it, everyone is free to use their own methods.
2) The Legal Newspaper Business:
I tend to view this business as pretty moribund. It is currently running at a loss on a trailing twelve month basis. Over the last 5 years, it has averaged a net profit of $500K. Go back further, and it has probably averaged $200K of net income per year. It does sit on some valuable downtown LA real estate. DJCO is currently trying to sell one of its two buildings. Based on that listing and other recent sales in the area, one could put a conservative value on the real estate of $25m.
So I will value it as worth more dead than alive - and stick a value of $25m on the newspaper biz or $18 per DJCO share.
3) The Software Business:
Here comes the tricky part. Publicly-listed software businesses are somewhat in disfavor these days over market fears that AI is going to severely disrupt their businesses. I have no informed opinion about that but there are some folks who are pretty enthusiastic about DJCO's DJ Tech software business.
What I do is I reverse engineer it. Based on the current market value of DJCO's stock less the value calculated above of the first two components, the imputed market value of the software business is $262m or $190 per DJCO share.
On a trailing twelve month basis, the software business had $76m of revenues, $16m of pre-tax income, and $12m of net income. These numbers seem to be growing nicely. Revenues have doubled over the last five years - especially under the leadership of the new CEO who has a tech background. The business was a money-loser for a long time as Munger invested behind it to grow it, but it seems to have achieved minimum break-even scale and is now consistently profitable as it grows.
Is an EV/Revenues = 3.5x, EV/EBT = 16x, and EV/net income (P/E ratio) = 22x a good value based on the imputed EV? I don't honestly know.
TD Cowen recently published a table of valuations for current publicly-listed vertical market software (VMS) companies. They averaged an EV/Revenues = 3.9x, and a P/E = 27x. So it looks like the imputed value for DJ Tech sits in the valuation zone that the market currently places on VMS companies.
Of course, this is my method for valuing DJCO. Do your own due diligence and make your own decisions about price vs value.
Hope this helps.
Bill
