Dolan revenue rises on foreclosures

Managing Wall Street's expectations can be a tricky game -- especially when you're one of the few companies that stands to reap financial gains from the misery market of home foreclosures.

Dolan Media Co. of Minneapolis found that out last month. More than half the company's revenue is foreclosure-related, according to one stock analyst. But a 26 percent increase in fourth-quarter revenue didn't satisfy investors because they were expecting even more foreclosures.

The company's stock price took a beating when those fourth-quarter numbers came out March 27, despite results that were slightly above Dolan's own forecast. In November, the company projected full-year revenue of $146 million to $150 million; the final number was $152 million.

Dolan's shares, which hit a high of $30.84 in late December, tumbled to $20.11 shortly after the report was released. Dolan closed Friday at $20.08, still well above its initial public offering price of $14.50 in August.

Three of the four analysts who cover the company like its publishing and business service mix and rate it a buy. (The fourth is neutral on the stock.) Wall Street was wrong to walk away, they say.

"We still like the company, the business, the management team and the stock," said Robert Evans of Craig-Hallum Capital Group. "Its foreclosure-processing business is only in three states, and the company wants to be in every state, so there is the potential for a lot of growth."

Dolan was taken aback by the market's reaction.

"It's difficult to determine what affects share prices, especially in this market," said Chairman and CEO James Dolan. "We are focusing on building our high-growth, high-margin, recurring-revenue company, we are proud of our balanced business that performs well in all economic cycles, and we work hard to make sure the market understands those characteristics."

Publications and more

In the Twin Cities, Dolan Media publishes Finance and Commerce, Minnesota Lawyer and the St. Paul Legal Ledger. It recently purchased Politics in Minnesota and made its publisher, Sara Janecek, Dolan's director of political coverage. Across the country, Dolan has 60 print publications and 55 websites in 21 markets. It employs 1,200 people.

But it's the foreclosure business, called American Processing Co. (APC), that seems to be drawing most of the attention to Dolan these days. Two years ago, Dolan bought a heavy stake in the company, which was owned by law firms that specialized in foreclosure proceedings. Dolan now owns 88.9 percent of the firm.

Dolan provides the back-room support to the lawyers who handle foreclosures on behalf of lenders in Michigan, Indiana and, starting two months ago, Minnesota. Dolan has expansion plans and has said it intends to make an acquisition in the foreclosure business by August.

But being in the foreclosure business is not without risk. Legislative proposals abound for foreclosure moratoriums and programs to help lenders with adjustable-rate mortgages. And bankruptcy judges in courts across the United States are starting to question the speed and efficacy of some foreclosure proceedings.

Dolan's annual report, filed with the Securities and Exchange Commission, warns of possible changes in the foreclosure environment. "[N]ew or more stringent regulations may adversely impact the number of mortgage default files that our law firm customers receive from the clients and can then refer to us for processing," it says in the risks section of the filing.

Piper Jaffray & Co. analyst Randy Hugen told investors in a recent report that he is lowering first-quarter revenue estimates for Dolan "on expectations that tax rebates and the federal stimulus package will slow foreclosures."

However, Hugen added, "We are increasing [second-quarter] estimates because of an expected jump in the number of subprime adjustable-rate mortgage resets."

Dolan's initial public offering in August was well received, and analysts like its positioning with its combination of business information and professional services.

Hugen has a buy recommendation and a $31 target price on the stock. Evans sees a "$40 to $60 stock opportunity." And, in a rarity in the news business these days, Dolan is hiring.

David Phelps • 612-673-7269