This post concerns an extremely illiquid and difficult-to-trade security. As always, I make no recommendation as to whether or not you should buy this security. If you do, please do so carefully.

Detroit Legal News is one of the old guard of OTC-traded “dark companies.” In DLN’s case, the “dark” part of the phrase is not particularly apt. The company provides quarterly reports with limited financials and full audited annual statements with footnotes, publishing them through OTCmarkets.com. Still, the company withdrew its SEC registration decades ago and has traded over-the-counter with limited volume ever since. The company was featured in the classic Walker’s manuals. Here is a picture of Detroit Legal’s entry in the 2002-2003 edition.

Detroit Legal News operates in possibly the most unattractive industry there is: newspapers. Fortunately for the company, its newspapers are niche publications created for the legal community of Michigan. The papers cover court proceedings and legal developments. Critically, the papers also publish legally required notices. These notices must be published in a paper such as those Detroit Legal News publishes. The rates the company can charge for these notices are dictated by the state government, but the fact that these notices must be published provides a recurring revenue stream for Detroit Legal News as its other revenue streams have come under heavy pressure. The company is well-aware that any any time, the legislature could change these publishing requirements, and has invested in software and online resources in case these legal notices go fully electronic.

Detroit Legal News owns 55% of its newspaper subsidiary, with another 35% held by Bridgetower Media. The member operating agreement of the newspaper subsidiary (Detroit Legal News Publishing, LLC) includes an intriguing “shootout” provision under which during the 60 days prior to each November 30, any member of the LLC can declare a value for the whole of Detroit Legal News Publishing, LLC. Then, the other LLC members have the option either to buy that member’s interest at the declared valuation, or sell their own interests to the declaring member at the same valuation. So far, no LLC member has exercised this right.

Detroit Legal News is consistently profitable, though profits have declined in tandem with printing revenues. Recently, the company sold off a parking lot it owned several decades for a tidy profit. I don’t expect many more surprises of that magnitude, but I do expect that Detroit Legal’s core operations will continue producing modest profits for many years to come. In 2019, the company earned $540,000, though this figure includes an impairment charge of $191,000 for a software project that has been slow to achieve momentum. Ignoring this impairment and adjusting for minority interest, the company would have earned about $700,000, or $18.50 per share. Revenue for the year was $14.95 million, down substantially from 2018 and down 30% from 2014 levels. Revenue will probably continue to decline at a high single digits rate annually, though a difficult economy is actually beneficial to Detroit Legal as the volume of foreclosure notices and the like rises.

At a share price of $320 and with revenues highly likely to continue rolling off, a price-to-earnings ratio of ~17x is certainly not compelling. However, Detroit Legal’s balance sheet is stuffed with cash and other valuable assets. Adjusted for the dividend paid in January, Detroit Legal News has cash per share of $242. Net current assets per share is ~$281 (ignoring operating lease effects and assuming all non-cash current assets and current liabilities reside at Detroit Legal News Publishing, LLC.) The company’s strong balance sheet offers quite a bit of downside protection. Historically, the company has always maintained a strong cash position while paying out essentially all earnings as dividends.

In my view, shares of Detroit Legal News Company are worth somewhere around $400 per share. Not a stock to own for its incredible return potential, but a lower-risk holding that is backed by an extraordinary balance sheet and a counter-cyclical business model. Or maybe the idea of owning one of the market’s oddities has some appeal. Regardless, Detroit Legal News is quite alone in its niche and fun to watch as it quietly profits year after year.

Alluvial Capital Management, LLC holds shares of Detroit Legal News Co. for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.