Description

Dag Media (DAGM) represents an opportunity to purchase a well-managed company with a unique franchise at a price below 75% of its cash balance of $2.38 per share. The company sells at a negative franchise value despite the fact that the company has essentially no competition for its main product, the publication of yellow pages for the Jewish community in New York City. For the first nine months of 2002 the company essentially broke even, before considering a change in accounting. The company has no debt and its liabilities consist predominantly of deferred revenues.

Background:

To fully appreciate the value of the company it is important to understand the company’s products and business.

A young energetic entrepreneur, Assaf Ran started the company in 1989. (Mr. Ran, the company’s current CEO, still owns 49% of the company and is now an industry veteran at the mature age of 37.) At that time he astutely saw an opportunity to publish an advertising directory focused on the large New York City Jewish community. The company first published the Jewish Israeli Yellow Pages in 1990 and has been publishing an issue in February and August of each year since 1991.

The Jewish Israeli Yellow Pages is a bilingual, yellow page directory that is distributed free through local commercial and retail establishments in the New York metropolitan area as well as through travel agencies in Israel. All ads in the Jewish Israeli Yellow Pages are in English and Hebrew unless the advertiser specifically requests that the ad be in English only. The Jewish Israeli Yellow Pages is organized according to the Hebrew alphabet, although it is indexed in both Hebrew and English. The product currently has no competition that the company is aware of.

Continuing it focus on the Jewish niche market, in October 1998 the company published the first edition of the Master Guide, a yellow page directory designed to meet the special needs of the Hasidic and ultra-Orthodox Jewish communities in the New York metropolitan area. The Master Guide differs from the Jewish Israeli Yellow Pages in that the Master Guide is published in English only, and that it does not advertise products or services that might offend the Hasidic and ultra-Orthodox Jewish communities. Generally, advertising rates for the Master Guide are lower than those for the Jewish Israeli Yellow Pages because the market that it serves is smaller.

In 1999 the company launched a general interest yellow page directory, New Yellow, at the request of its ethnic directory advertisers who asked if the company could provide them with an alternative to the Verizon Yellow Pages. NewYellow competes directly with the Verizon Yellow Pages in New York City. Although, they entered a very competitive market the company has had good success in competing with Verizon and other new entrants in this market.

The company currently publishes and distributes yellow page directories in print and on the worldwide web, both in the mainstream yellow page industry as well as in targeted niche markets in the New York metropolitan area. The company sells yellow page advertisements as part of an overall media package that includes print advertising, on-line advertising and other added value services such as our referral service and consumer discount club

In August 2002, after Mr. Ran waited nine months until the seller met Mr. Ran’s low price, the company purchased The Blackbook Company, a leading publisher of photography and illustration directories for finding photographers and illustrators in North America, for a net cost of about $300,000. The purchase of this business is indicative of Mr. Ran’s savvy and operating style. Mr. Ran believes that this business, which has about $2 to $2.5 million of revenue and has been running at about break even, has great potential once he is able to cut costs and refocus its efforts. Mr. Ran looks at this purchase as essentially buying a cheap option with a very limited downside given what he paid for it. He believes the concepts that led to the success of the Jewish Yellow Pages can be directly applied at Blackbook.


Recent Performance:

The company had projected annual revenues of about $6 million prior to the Blackbook acquisition, with $3.5 to $4 million derived from the Jewish Yellow Pages/Master Guide and the balance from The New Yellow Pages. Blackbook will add about $2 million to annual revenues. For the nine months ending in September 2002, the company ran at breakeven.

For the third quarter the company reported a 26% increase in revenues versus last year as a result of increased sales of the Jewish Yellow Pages even in the face of reduced advertising budgets. The company reported a small loss ($.03 per share) due to the consolidation of Blackbook expenses without realizing any revenues from the acquisition. The lack of revenues was simply a result of the fact that Blackbook was not scheduled to publish a directory during the quarter. Blackbook is expected to generate revenues in the fourth quarter as it published a directory in December.



Prospects:

The company is very encouraged with its recent strong performance in its mature New York Jewish Yellow Pages, which continues to generate a nice profit. The New Yellow Pages business is not profitable yet, but continues to grow nicely and the company is expected to open a fourth New York sales office soon. The company also reports that it has made good progress in restructuring the Blackbook business and expects this business segment to be profitable in 2003.

The company can certainly be criticized for using the cash flow from its Jewish Yellow Page business to fund the development of its very competitive general yellow page business, but it also deserves credit for growing this business in an extremely competitive and soft advertising environment. Mr. Ran is not one to waste money or resources in chasing concepts. As an example, he operates his business in Queens, one of the outer boroughs of New York City, where the rents are much cheaper than in Manhattan. In fact, one of the first things he did upon buying Blackbook was to shut down the company’s Manhattan offices and move the operation to Queens.

For the future the company is exploring opportunities for publishing and introducing Jewish Israeli Yellow Pages and Master Guide directories in other cities with large Jewish and Israeli populations, like Miami, Florida and Los Angeles, California.

Balance Sheet:

The company has an extremely strong balance sheet. It has $7.1 million in cash ($2.38 per share), current assets of $11.7 million and working capital of $5.8 million or $1.93 per share. The company has no long term debt and its $6 million of short term liabilities are made up of $4 million of deferred revenue and a $1 million account payable balance that came from the Blackbook acquisition. Mr. Ran is extremely cautious in the use of the cash and has pledged not do to something imprudent with it.

Valuation

The company is extremely cheap by any fundamental measure. It sells at a negative enterprise value, 74% of its cash position and 91% of its working capital. These valuations imply that the company’s business is worthless. Even if we apply no value to its general yellow page and Blackbook businesses, the Jewish Yellow Page segment is clearly unique and valuable. I would estimate that this business conservatively generates about $.15 to $.20 per share in annual earnings, which would give a value of at least $1.50 per share at a P/E of 10!


Summary

I believe DAGM represents excellent value at its current price for the following reasons:

1) The shares sell below the company’s working capital and cash balance.
2) The company has a unique operating segment that essentially runs as a monopoly in the New York area, that the market is valuing at zero.
3) The CEO is an intelligent and frugal entrepreneur who started the company over ten years ago with nothing and has built an organization with expected sales of over $8 million in 2003.
4) The prospects for growth look encouraging.

On the negative side the shares are not very liquid, but they can be purchased with some patience. The focus on the competitive general yellow page directory is of concern.


Catalyst:

1) Hummingbird Management has been aggressively accumulating shares over the past six months and has accumulated about a nine percent position.
2) The CEO is clearly not satisfied with the valuation of the company’s shares and is fully prepared to take action to realize their value.
3) The company has a significant cash position to use to buy back shares or possibly take the company private.

Catalyst

1) Hummingbird Management has been aggressively accumulating shares over the past six months and has accumulated about a nine percent position.
2) The CEO is clearly not satisfied with the valuation of the company’s shares and is fully prepared to take action to realize their value.
3) The company has a significant cash position to use to buy back shares or possibly take the company private.