Charlie Munger's Other Company: Daily Journal Corporation
While most investors know Charlie Munger as Warren Buffett's partner at Berkshire Hathaway (BRK.A), some might not know that he also holds the role of Chairman at Daily Journal Corporation (DJCO). Two important items -- one investor analysis worthy, and one newsworthy -- flow from this. First, DJCO in it of itself seems to trade at a nice discount, and could prove a profitable investment. Second, Mr. Munger, in his role as Chairman, takes questions each year at the DJCO Annual Meeting, and whose contents get transcribed and published. In this article I will lay out briefly why I think DJCO represents an attractive opportunity for investors, and also recap some of the highlights from his presentation and question/answer session at the the annual meeting.
Daily Journal Corporation
DJCO operates in two segments -- its traditional newspaper business, and in its software business. Its traditional newspaper business consists of small, but highly specialized newspapers that cater to specific segments of society. Revenue from this segment flows from subscriptions, advertising, and most importantly public announcements that legally need to advertise in a newspaper. In recent years, especially due to the foreclosure boom, revenue from these notices has risen considerably. With this excess cash, management, presumably with significant input from Mr. Munger has shifted their focus from investing excess cash (much like BRK’s famous ‘float’ from insurance) from Treasuries and into equities. In the past year, the DJCO securities portfolio doubled in size from $50mm to $100mm, while its US Treasury portfolio shrank from $18mm to just under $1mm. This securities portfolio makes up the largest position on the company's balance sheet, but definitely not its only asset.
While undoubtedly the newspaper business will continue to suffer, and presumably at some point the public notice business will become obsolete, the company could still reasonably transfer its newspaper business online. and maintain its following. Meaning, the business has some value. Additionally, the company has two software businesses -- Sustain and New Dawn -- that provide specialty software products, and it owns its 71,000 square foot office building (and parking lot) in Downtown LA. On the balance sheet, the company values its office building before depreciation at $12mm, but considering the location in Downtown Los Angeles, where office space rents at $36/sq foot, and attaching a conservative 8% cap rate, you get a value closer to $30mm.
Lastly, the company holds $20mm in deferred tax liabilities on their balance sheet from unrealized gains in the equity market. Presumably the company will employ a tax efficient strategy where they will either not have to recognize any of the gains, because they won’t sell, or the tax liability will come in significantly below estimates.
Therefore, when taken together, the $100mm securities portfolio, the $30mm office building, less $10mm in accounts payable and deferred subscriptions, DJCO has a NAV of $120mm. Currently, DJCO trades at close to all time highs, but still only has a $140mm market cap. Meaning, by buying this stock you essentially get all of the assets, and two free call options -- one for the newspaper business and one for the software business. Sounds like a good deal!
Recap From Q&A
Most of the Q&A veers away from DJCO and into more general business questions. Mr. Munger produces a lot of his classic gems in these events, but I will stick to the highlights he made about business in general.
The Rating Agencies
The three rating agencies -- S&P (MHP), Moody’s (MHC), and Fitch (private) -- have come under a great deal of scrutiny. Someone asked Mr. Munger his thoughts on the recent government suit of S&P. He responded that the ratings agencies gave opinions not guarantees, and that if the issuers would have wanted guarantees they would have needed to pay a lot more money. Additionally, Mr. Munger noted that a lot of times the prosecution produces a very damaging email, that while not an indictment in it of itself, could give reason to a jury to award a nice monetary payment to the plaintiff.
In connection with this, Mr. Munger noted that the rating agencies got greedy, and took “bad money”. He noted that sometimes its better if you make less, but better money. He took the example of Price Club (COST), where the founder decided he didn’t want business from people who shoplifted, wrote bad checks, or would clog up his parking lot without buying anything. Therefore, he invented a system (forcing to buy membership) that kept people like that out. Did he lose out on some business? Sure. But he believed he would fare better without it.
Mr. Munger noted with amazement that BRK has been able to pile up so many victories without the benefit of large amounts of debt.
Mr. Munger reiterated what you can find in the BRK annual letter where Mr. Buffett goes through why he thinks local newspapers, with strong local followings will succeed in the long run. Basically, these papers serve a captive audience that really cannot get the type of info this paper provides anywhere else.
Manufacturing have long left the US for cheaper Asian alternatives. With that said, the local manufacturing of durable goods, including elevators and airplanes, will remain strong. Mr. Munger specifically noted Boeing (BA) and Otis (UTC) as particularly adept in this area. Otis elevators have the added benefit that they have service and maintenance fees, which outside companies have a hard time taking away from the main manufacturer.
Mr. Munger made two points when it comes to retail .First, branded goods have begun to lose out to private label goods. Mr. Munger relayed that he bought Kirkland Brand toothpaste from Costco, and didn’t notice any difference between it, and other brands. This does not bode well for companies like Proctor & Gamble (PG), Unilever (UL) and Colgate (CL). Second, you have the Amazon (AMZN) problem.
Li Lu, who got Mr. Munger started on BYD answered the question in this area. He said that BYD has compounded 75% over the last 15 years, and continues strong growth. They produced their first car in 2005 and now sell 500k cars/year. They have made their entrance into the American market, but through public transportation, which emits more pollutants, and gives them brand recognition. Lastly, they still have a large market opportunity in China where they do not sell any of their cars in Beijing, which has one of the worst pollution rates anywhere in the world.
Personally, I found the takeaway from this Q&A session to be that companies that have pricing power will continue to succeed. Namely, Mr. Munger cited See’s Candy as a perfect example, that they can raise the price 25 cents/year and no one care. He mentioned it when it came to the New York Times (NYT), and network television. Pricing power, it would seem, has a very high place on the totem pole of Old Charlie’s investing principles.