AI Solutions Will Reshape Digital Media As Legacy Risks Persist

Key Takeaways

• Significant investment in AI-driven technologies aims to boost digital content engagement, advertising revenue, and future digital revenue growth.
  
• Identified cost reductions and asset monetization will enhance financial stability through improved liquidity, debt reduction, and optimized print operations.
  
• Heavy reliance on AI and digital transformation poses execution risks and financial uncertainties, affecting revenue growth, investment costs, and digital subscription competitiveness amidst industry changes.

Catalysts

Provides local news and information, and advertising services in the United States.

• Lee Enterprises is investing significantly in AI-driven personalization and AI business technology, which is expected to enhance digital content engagement and advertising capabilities, positively impacting future digital revenue growth.
  
• The launch of new AI-powered advertising solutions, such as the SmartSearch platform and AI Boost program, aims to increase advertiser engagement and revenue, which is projected to contribute to higher net margins and earnings.
  
• The company has identified $40 million in annual cost reductions to be executed by the end of the second quarter, which is anticipated to improve net margins by optimizing legacy print business operations and driving efficiencies.
  
• Lee's strong performance in digital subscription and Amplified Digital Agency revenue growth provides a solid foundation for sustained revenue growth, with digital subscriptions growing 14% year-over-year and a broader strategy targeting 7% to 10% total digital revenue growth for FY 2025.
  
• The monetization of $25 million in noncore assets is expected to improve liquidity and facilitate debt reduction, thereby enhancing financial stability and potentially positively impacting future earnings.

Lee Enterprises Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lee Enterprises's revenue will decrease by 1.5% annually over the next 3 years.
• Analysts are not forecasting that Lee Enterprises will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Lee Enterprises's profit margin will increase from -7.2% to the average US Media industry of 8.5% in 3 years.
• If Lee Enterprises's profit margin were to converge on the industry average, you could expect earnings to reach $48.9 million (and earnings per share of $8.15) by about May 2028, up from $-43.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 3.4x on those 2028 earnings, up from -1.2x today. This future PE is lower than the current PE for the US Media industry at 16.8x.
• Analysts expect the number of shares outstanding to grow by 0.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Lee Enterprises Future Earnings Per Share Growth

Risks

• The digital transformation initiative relies heavily on AI partnerships and technologies that are still in the early stages, which introduces execution risk and uncertainty about achieving projected digital revenue growth of 7% to 10% year-over-year. This reliance on new tech could impact future revenue if not successfully implemented or adopted.
  
• Lee Enterprises’ focus on AI-driven solutions could lead to significant upfront investment costs and resource allocation that may not immediately translate into increased revenues or could even temporarily hinder net margins if costs exceed initial revenues from these initiatives.
  
• Monetization of non-core assets and cost reductions are key strategies for liquidity and debt management, but there is no guarantee these will be realized as planned, potentially impacting their ability to sustain earnings and manage debt effectively.
  
• The decline and optimization of the legacy print business remain a risk, as shrinking traditional revenue streams need to be effectively replaced with growing digital revenues, posing a risk to overall profitability and net margins during the transition.
  
• The ambitious three-pillar digital growth strategy and long-term revenue targets heavily depend on maintaining superior digital subscription and advertising growth, which could be threatened by industry competition or shifts in consumer preferences, thereby affecting projected revenues and earnings stability.

Valuation

• The analysts have a consensus price target of $20.0 for Lee Enterprises based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $573.7 million, earnings will come to $48.9 million, and it would be trading on a PE ratio of 3.4x, assuming you use a discount rate of 11.4%.
• Given the current share price of $8.5, the analyst price target of $20.0 is 57.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.