What Does Everyone Think of the Newspaper Industry?
I'm seriously thinking of investing in the newspaper industry. What does everyone think of my latest idea? Is this the best way to lose money or is there something more to it? If you have any opinion, bearish or bullish, feel free to leave a comment.
Newspapers certainly fits the contrarian requirement. They are totally out of favour, with many thinking most newspaper companies with go bankrupt within 10 years. Stock prices of newspaper companies are down anywhere from 50% to 90% in the last 5 years. Most companies have very low trailing valuations (P/Es around 10 or less; dividend yields around 5%; price-to-sales ratios as low as 0.5.) Forward valuations also look cheap. But the question is what happens 10 years from now; not what happens next year.
Most of my research has been on Torstar (TSX: TS.B), which is one of the top Canadian newspaper companies. I have also looked at New York Times (NYT) as a possibility. I narrowed it down to these given that they have strong brands and online properties, and their liberal stance (I'm more familiar with the liberal papers.) Do note that, even though I say newspapers, these companies may also have holdings in non-news online properties, radio stations, tv stations, magazines, books, and so forth. Torstar consists primarily of newspapers (70% of sales), with women's book publishing, internet properties, along with strategic investments in television, Western Canadian newspapers, and Canada's #1 internet job search site (workopolis).
Political Stance Not An Issue
Some mistakenly believe that newspapers are suffering because they are too liberal or too conservative but that is not the case in my opinion. Papers, whether liberal or conservative, or even centrist, are suffering. Washington Post (liberal) is facing problems but so is Washington Times (conservative); New York Times (liberal) has problems but New York Post (conservative) is no different; in Toronto, all the big ones, whether it is the National Post (conservative), The Globe & Mail (centrist/liberal), Toronto Sun (conservative), or Toronto Star (liberal) are having problems. Even those trying to cater to the mass-market by becoming centrist, dumbing down content are facing issues. Circulation is down regardless of who or what you are.
The Two Threats
The threat to newspapers consist of declining readership (whether printed paper, online, or both) and shrinking margins (even if a reader of the print paper switches to the same paper's website, the newspaper companies make less money.) There are a lot of other issues but if you are considering taking a position, you need to have an answer to why your company can overcome these problems.
Problem 1: Declining Readership
From an investment point of view, declining readership is not bad if it is contained. As long as the papers can maintain a relatively high readership--possibly by capturing an online audience--while reducing costs, it can work out. It won't be easy and many newspapers will go bankrupt but the survivors should do fine.
Do keep in mind that newspapers in North America make very little off subscriptions; nearly all the revenue is off advertising. So, at some point in the future, they can provide newspapers for free if they can keep their costs down (there are already free "transit" dailies but I'm talking about the full paper.)
I think it is only worth investing in companies with strong brands that can be translated into readership, either at the national/international level or rural level. For example, The New York Times derives about 10% of its revenue from online sites, and is consistently ranked in the top 15 visited sites. Similarly, the Wall Street Journal (not publicly traded) has a strong online presence. In contrast, there are numerous newspaper companies that do not have a strong brand and likely will have difficulties attracting online readers. For these companies, their strategy should be to tap the local communities that they serve.
Some think that the newspapers won't be able to survive in an online world against the news aggregators like Google and Yahoo, or against blogs/user-generated-content, all of which are free. I think this argument is overblown. Bloggers generally target a niche and have zero quality control or journalistic standards. I view blogs or other user-generated content as simply an additional source complementing mainstream news/magazines. As for news aggregators or some similar setup, you will notice that nearly all the news still comes from newspapers. The papers still have dominant strength when it comes to content. What they need to do is to figure out how to monetize that better and attract readers to their sites.
Problem 2: Shrinking Margins
Newspapers used to be quasi-monopolies in their cities/towns/rural communities so they are never going to have the same audience in a competitive online world. However, I think those that succeed will still be able to attract enough readers (smaller but enough of a critical mass). The problem is that margins in the online world are much lower than for papers. I never realized this until I started looking at the industry but newspapers had unbelievable margins in the past (15%+ operating margins at some of the top companies). The lower margins mean two things.
First of all, investors are going to price the newspapers at lower multiples in the future. This process has been ongoing for several years now. These companies do not deserve the valuations of the past because they lost their quasi-monopoly status.
Secondly, taking a page from Bill Miller's thoughts on Amazon, I think if a successful transition to the online world can be made, returns on capital will actually be much higher. Amazon has very high returns on capital (Amazon's ROE is something like 50%!!!) even though its profit margin is 3% (similar to a retailer). Newspapers aren't going to be that good but capital costs will be far lower for an online outfit than it is for the printing business with factories containing expensive and large presses, expensive operators, and so on. The difficulty is capturing readers in a highly competitive and fragmented online world; and covering (for the near future) the high fixed costs of their printing operations.
So, the situation won't be anywhere as good as in the past. But I just don't see the collapse of the industry within 10 years. Newspapers may seem like the horse & buggy in a car world, but if they are ones building engines for the car industry, it can be a profitable investment.
Lest someone mistake anything I wrote... I want to emphasize that this isn't for the faint of heart. If anything I say turns out to be wrong, say the papers can't migrate successfully to the online world and see their paper operations bleeding profusely, disaster would be an understatement.
Newspapers certainly fits the contrarian requirement. They are totally out of favour, with many thinking most newspaper companies with go bankrupt within 10 years. Stock prices of newspaper companies are down anywhere from 50% to 90% in the last 5 years. Most companies have very low trailing valuations (P/Es around 10 or less; dividend yields around 5%; price-to-sales ratios as low as 0.5.) Forward valuations also look cheap. But the question is what happens 10 years from now; not what happens next year.
Most of my research has been on Torstar (TSX: TS.B), which is one of the top Canadian newspaper companies. I have also looked at New York Times (NYT) as a possibility. I narrowed it down to these given that they have strong brands and online properties, and their liberal stance (I'm more familiar with the liberal papers.) Do note that, even though I say newspapers, these companies may also have holdings in non-news online properties, radio stations, tv stations, magazines, books, and so forth. Torstar consists primarily of newspapers (70% of sales), with women's book publishing, internet properties, along with strategic investments in television, Western Canadian newspapers, and Canada's #1 internet job search site (workopolis).
Political Stance Not An Issue
Some mistakenly believe that newspapers are suffering because they are too liberal or too conservative but that is not the case in my opinion. Papers, whether liberal or conservative, or even centrist, are suffering. Washington Post (liberal) is facing problems but so is Washington Times (conservative); New York Times (liberal) has problems but New York Post (conservative) is no different; in Toronto, all the big ones, whether it is the National Post (conservative), The Globe & Mail (centrist/liberal), Toronto Sun (conservative), or Toronto Star (liberal) are having problems. Even those trying to cater to the mass-market by becoming centrist, dumbing down content are facing issues. Circulation is down regardless of who or what you are.
The Two Threats
The threat to newspapers consist of declining readership (whether printed paper, online, or both) and shrinking margins (even if a reader of the print paper switches to the same paper's website, the newspaper companies make less money.) There are a lot of other issues but if you are considering taking a position, you need to have an answer to why your company can overcome these problems.
Problem 1: Declining Readership
From an investment point of view, declining readership is not bad if it is contained. As long as the papers can maintain a relatively high readership--possibly by capturing an online audience--while reducing costs, it can work out. It won't be easy and many newspapers will go bankrupt but the survivors should do fine.
Do keep in mind that newspapers in North America make very little off subscriptions; nearly all the revenue is off advertising. So, at some point in the future, they can provide newspapers for free if they can keep their costs down (there are already free "transit" dailies but I'm talking about the full paper.)
I think it is only worth investing in companies with strong brands that can be translated into readership, either at the national/international level or rural level. For example, The New York Times derives about 10% of its revenue from online sites, and is consistently ranked in the top 15 visited sites. Similarly, the Wall Street Journal (not publicly traded) has a strong online presence. In contrast, there are numerous newspaper companies that do not have a strong brand and likely will have difficulties attracting online readers. For these companies, their strategy should be to tap the local communities that they serve.
Some think that the newspapers won't be able to survive in an online world against the news aggregators like Google and Yahoo, or against blogs/user-generated-content, all of which are free. I think this argument is overblown. Bloggers generally target a niche and have zero quality control or journalistic standards. I view blogs or other user-generated content as simply an additional source complementing mainstream news/magazines. As for news aggregators or some similar setup, you will notice that nearly all the news still comes from newspapers. The papers still have dominant strength when it comes to content. What they need to do is to figure out how to monetize that better and attract readers to their sites.
Problem 2: Shrinking Margins
Newspapers used to be quasi-monopolies in their cities/towns/rural communities so they are never going to have the same audience in a competitive online world. However, I think those that succeed will still be able to attract enough readers (smaller but enough of a critical mass). The problem is that margins in the online world are much lower than for papers. I never realized this until I started looking at the industry but newspapers had unbelievable margins in the past (15%+ operating margins at some of the top companies). The lower margins mean two things.
First of all, investors are going to price the newspapers at lower multiples in the future. This process has been ongoing for several years now. These companies do not deserve the valuations of the past because they lost their quasi-monopoly status.
Secondly, taking a page from Bill Miller's thoughts on Amazon, I think if a successful transition to the online world can be made, returns on capital will actually be much higher. Amazon has very high returns on capital (Amazon's ROE is something like 50%!!!) even though its profit margin is 3% (similar to a retailer). Newspapers aren't going to be that good but capital costs will be far lower for an online outfit than it is for the printing business with factories containing expensive and large presses, expensive operators, and so on. The difficulty is capturing readers in a highly competitive and fragmented online world; and covering (for the near future) the high fixed costs of their printing operations.
So, the situation won't be anywhere as good as in the past. But I just don't see the collapse of the industry within 10 years. Newspapers may seem like the horse & buggy in a car world, but if they are ones building engines for the car industry, it can be a profitable investment.
Lest someone mistake anything I wrote... I want to emphasize that this isn't for the faint of heart. If anything I say turns out to be wrong, say the papers can't migrate successfully to the online world and see their paper operations bleeding profusely, disaster would be an understatement.
Never wrong...just early..way way early!
ReplyDeleteTiming is tough and it's not my game... when do you suspect it might be better?
ReplyDeleteI'm thinking it's worth contemplating in a few months... my thinking is that the newspapers are going to post horrible earnings once the economic slowdown is evident (advertising will likely weaken over the next 6 months)... then it's worth looking at them... But beyond that, it's hard to see why you should wait. The main reason I would wait is to see who the losers are and then go with the winner. However, the stock price may go up a lot by the time that is obvious...
I would expand your universe to take a look at Pearson Plc (PSO on NYSE, PSON on LON).
ReplyDeleteThey have superior content (The FT and The Economist) that continues to get better relative to their competition and they've not only developed a superior content delivery strategy for the online world, they've executed the strategy quite well.
Note: not a recommendation to do anything, other than take a look.
I own some NYT shares, and you are correct--newspapers or media stocks might be worth a look at these prices. You may also consider Barry Diller's companies.
ReplyDeleteK_Yew,
ReplyDeleteWhat's your thesis for investing in NYT? Does it mainly rest on them shifting successfully to the online world?
I say stay away...Charlie Munger talks about invested in growing companies that are very undervalued. There is nothing growing about the newspapers. I agree they may be able to hold pat, but the stock market will not reward them for that. The multiples will be lower for years to come if their margins don't grow.
ReplyDelete