There has been a solid recovery in newspaper and media plays in recent weeks, for some obvious merger reasons. But the continuously deteriorating fundamentals in the sector lend a credence that the sector is just getting a reprieve that is masking the obvious trend.
Despite the mini-rally seen of late in newspaper stocks, Goldman Sachs remains unchanged and suggests selling into strength in the newspaper sector. The purchase of Tribune (TRB) at 10-times EBITDA by Sam Zell and the major premium buyout offer from News Corp. (NWS) to Dow Jones (DJ) are fueling the speculative fire for more deals in the sector. Goldman thinks the ad revenues in Q2 will be down in the 5% range for newspapers, which is the second worse performance since the recession impacted Q1 2002.
What is interesting is that Goldman notes that there ‘undoubtedly will be further consolidation’ in the sector, but expresses a ‘remain underweight’ stance because of downward revenue trends, operating margin pressure, and downward earnings revision bias. It also notes that valuations are not enticing for a declining fundamental basis.
So how far off of lows are these companies?
Company (Ticker) Price Today 52-Week Range
Gannett (GCI) $58.75 $51.65-$63.50
McClatchy (MNI) $27.90 $27.42-$45.29
EW Scripps (SSP) $46.00 $40.86-$53.39
New York Times (NYT) $25.85 $21.54-$26.90
Belo Corp. (BLC) $22.30 $14.93-$22.94
Lee Entrprs. (LEE) $24.92 $22.98-$25.13
Journal Comms. (JRN) $13.80 $10.05-$14.00
If you read media publications in the sector, the trend has been that major metro publications are the ones that have been experiencing the rapid drop-off. The rural and small city papers is where the mergers have been and where the strength has been. It isn’t so much that these areas are just full of non-webby bumpkins because that isn’t the case. It’s just that the farther and farther you get away from major population centers the live and daily information becomes decentralized and it easier to keep it focused in a newpaper and ‘weeklies’ type of local publication. That lends credibility to GateHouse Media Inc. (GHS-NYSE), still a fairly recent IPO.
With some of the trends continuing and an economy that is slowing, it is hard to fall back in love with the sector. But there has been so much damage and the ‘undoubted consolidation’ just makes it harder and harder to consider putting new funds to work in the companies that have not recovered. Sure, there will be more carnage in the sector and there will probably be some extra erosion in the stocks of the ones that have less value.
A year from now it is likely we’ll still be discussing the carnage in newpaper and print media trends. But we might be discussing the trends of companies that have either merged or been taken private, or at least fewer public companies. With an election in 2008, its still a toss-up if newspapers will stabilize or if the new-media will steal away so much that even a larger market may not help. If you have read our work frequently you will probably recallreferences to "Less Bad Is Good," and this may be a trend to watch for (or maybe just hope for) inthe sector. Perhaps digital paper will take newspapers to a new realm.
The verdict is still out, for now.
Jon C. Ogg
June 6, 2007
Jon Ogg can be reached at firstname.lastname@example.org; he does not own securities in the companies he covers.