Trade idea #2: Restructured U.S. micro cap with special dividend [CLOSED]
This sub-$50M market cap local media company trades at <1X FY25 FCF and is expected to distribute a special dividend valued at >80% of its current share price
We closed out our position in DALN following news of its acquisition by the Hearst Corporation. We acquired shares at an average cost basis of ~$7.30 around the time we pitched it, and sold at ~$13.30, achieving a ROI of ~82% and IRR of ~215%.
The following opportunity is a sub-$50M market cap U.S.-listed local media company undergoing a restructuring and trading at <1X FY25 FCF.
The company recently conducted a major asset sale and is expected to distribute a special dividend that represents >80% of its current share price.
If this special situation is of interest, read on…
DallasNews Corporation ($DALN) presents a compelling opportunity, currently trading at <1x FY25 FCF. The company operates The Dallas Morning News, Texas’ leading newspaper, which is the only major local paper in Dallas and holds a dominant position in the growing North Texas market.
At current prices the existing $DALN business is still valued near $0 after the announced sale of its $43M plant. Mgmt plans to dividend out proceeds. This business has recently inflected to profitability and is expected to report EBITDA of $3-5M in 2025. Comps trade at 5-8x EBITDA
Despite a long history of challenges, DALN 0.00%↑ is nearing a return to growth. The company reported an operating profit for the first time in 10 years in Q2 2024, and while declines are expected in the short term due to seasonal weaknesses in advertising, management is optimistic about returning to sustainable and recurring revenue growth starting in early-to-mid 2025.
The company’s growth strategy is focused on four key areas:
Optimizing digital subscriptions for The Dallas Morning News
Launching new digital products
Carefully managing the ongoing decline in print circulation
Maintaining stringent control over operating expenses.
In recent years, DALN 0.00%↑ has focused on maximizing digital circulation revenue, adjusting subscription prices to $30 per month while cutting back on promotional periods. Although digital circulation volume has decreased as a result, management believes the price increases have reached their peak and plans to optimize both price and promotions to drive continued revenue growth. They also intend to enhance the digital user experience with more video content, improved user interfaces, and targeted news offerings.
A major part of DALN’s strategy for growth is the development of new digital products, which could help diversify the company’s revenue streams. Management has brought in a new Chief Product and Innovation Officer to spearhead this effort, with niche topics such as Real Estate, Airlines, Food, and High School Sports expected to generate significant interest. Any new product is expected to generate at least $1 million in annual revenue at a 20% margin within two years of launch. While the print business continues to experience declines in circulation, DALN 0.00%↑ has been able to offset some of this loss through higher subscription prices, resulting in a more manageable ~5-7% annual revenue decline in print.
In terms of cost control, DALN 0.00%↑ has made significant strides in reducing its operating expenses. The company has exited non-core and unprofitable businesses, sold off assets, and reduced headcount where necessary. Although it is unlikely that there will be further large-scale reductions in expenses, management is focused on being strategic with any new expenditures, particularly in areas that will support revenue-generating activities. The transition of the printing plant is expected to save $5 million annually, which further strengthens the company’s financial outlook.
Looking ahead, DallasNews is expected to generate ~$3-5 million in EBITDA in 2025, driven by cost savings from the plant transition, potential digital revenue growth, and a gradual decline in print business revenue. This forecast is based on the assumption that DALN will be able to manage its expenses effectively while continuing to optimize its core business. With no traditional debt, tax liabilities, or significant capital expenditures, DALN’s EBITDA is a good proxy for its free cash flow, making it an attractive investment.
Based on these projections, DALN 0.00%↑ could be worth anywhere between $8 and $13 per share.