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Gamble of the week: An embattled newspaper group
This beleaguered newspaper group is mired in debt, says Phil Oakley. But its ability to generate plenty of cash makes it a buy for the brave.
There are many ways to make money in the stockmarket. But one of the most reliable is to track down and buy decent, quality companies that have had their shares hammered unfairly by the market.
The idea behind this approach known as value investing is that if you can buy a company for less than its fair' value (according to your calculations at least), and you are both patient and stubborn enough to sit on it, then eventually other investors will realise that they've got it wrong and put a much higher valuation on the company.
In the process, you'll make a handsome profit. Legendary investors such as Benjamin Graham, Warren Buffett and John Templeton all made their fortunes using this often contrarian approach.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
So the question today is: is embattled newspaper group Trinity Mirror one of these diamonds in the rough? The owner of the Daily Mirror national newspaper and a string of regional papers is facing a lot of problems just now.
The number of people buying its newspapers is going down, while advertisers are also spending less money with the group. As a result, the amount of money coming into the business is falling too.
As if that wasn't bad enough, Mirror Group Newspapers which publishes the Daily Mirror, Sunday Mirror and The People has now found itself embroiled in a phone-hacking scandal similar to the one that is still causing problems for Rupert Murdoch's newspapers. Some investors are worried that this will end up costing Trinity Mirror a lot of money.
Finally, the company's finances don't look too clever. The market value of the company is just over £200m, but it has debts of £162m and a whopping big hole in its pension fund of £283m.
In short, the company has some significant problems. And these have combined to push the share price to very low levels. Trinity Mirror shares now trade on just 2.9 times expected profits for 2012. So is the situation bad enough to justify this?
Trinity Mirror (LSE: TNI)
To me, it looks like Trinity Mirror's shares are almost priced for bankruptcy. I'm not sure things are really that bad. Having got rid of the very expensive Sly Bailey (who took home over £1.7m last year), Simon Fox is now running the company.
He knows a thing or two about digital media, having spent a few years at HMV where digital music knocked the stuffing out of CD sales. Fox plans to lick Trinity Mirror into shape with better websites and apps for mobile phones and tablet computers. This should give its editorial content a chance of competing in the digital market.
Costs should also start coming down. Indeed, £20m has already been taken out of the business this year. More should follow as the company's regional and national newspapers are merged into one separate business. This should stop profits from falling too much.
However, the main reason to be bullish on Trinity Mirror is its cash flow. The business generates lots of surplus cash after it has paid all its bills. This has allowed it to pay down nearly £60m of debt already this year. The fact that City analysts do not expect profits to collapse means that lots of cash should still keep flowing. In fact, at that rate, it's possible that Trinity could be debt free three or four years from now.
More importantly, these cash flows mean that a buyer of the business today could end up getting their money back quite quickly. So although the shares are quite risky as distressed companies often are they look worth a gamble.
VERDICT: SPECULATIVE BUY AT 79P
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