Here's some quick info that shows me where the ad revenue went from the newspaper's industry top line. Recession or no recession, these numbers are staggering, and lead me to believe the bulk of the money will not come back to newspapers once the recession is over and unemployment numbers drop.
2001 $86 million
2003 $1.466 Billion
2005 $6.139 Billion
2007 $16.594 Billion
2009 $22.5 Billion
If you were a newspaper company like McClatchy back in 1999, when you had people coming to your sites, reading the news and searching archives for information, wouldn't it have made sense to develop a search engine that worked?
Google has taken this money from every other media company. The movement has been from mom and pops right up to the big car dealers, airlines, realtors, builders, auto manufacturers, and banks. This money is gone forever, so if Pruitt thinks things are going to get back to pre-2002 revenue numbers,he's wildly optimistic.
Target price short term is $1.35.
Uuughhh. I just spent 15 min typing an eloquent reply to your model and then it timed out. I'll come back to it this weekend, but the main points were that 1) the diff between a 6 and 9X multiple is huge for a $170M company; 2) subtracting debt does not take into account expiration...that they have two+ years as long as they don't trip a debt covenant. Regardless, interesting email...you clearly know your stuff. I'll eventually convince you, though.
I bought and sold some companies with annual sales in the $3 to 15 million range. I've participated in some private equity leveraged buyout deals ranging from $100 million to 10 billion where they use anything from the 4.8 to 9. I once had Warren Buffett buyout a company called Garan where I was invested... he stole it paying 4.5 times. 6 is my favorite #.
Yeah, I'm afraid to estimate valuation multiples for this battered a sector in this market. How'd you come up with 6? Ha...Don't worry, Pruitt will soon convince the world that MNI is an internet company, so we'll get the 13 X EBITDA of Google and we'll trade at $52.
My quick estimate for 2009 EBITDA is $300 million. Figure MNI might be worth 6 times that... $1.8 billion, which after subtracting the debt of $1.95 billion still leaves negative value to equity. My glasses is still half empty.
Sorry for being defensive.
For instrinsic value, lemme start with my assumptions:
1) discount rate 4.5% (starting with non-controversial)
2) $2B debt
3) Steady state as-is earnings from last quarter (let's say LT is right and we annualize to $1.60-2 a share), so no growth rate, no terminal value (so what I'm saying is that we don't need to return to the glory days of 5 years ago, that we are now content as a niche player). So the next qtr's earnings must prove that MNI indeed took a sustainable meat cleaver to costs.
4) Free cash is strangely tough because the balance sheet is a mess accounting wise with tons of one-time items, so let's take a huge haircut off the $450M and just say that they can translate earnings into free cash
Plug that into any model and you'll get between $7 and $11. BUT, you will correctly argue, the free cash isn't "free" because the debt covenants will kick in more, potentially tripping MNI into BK. Moreover, as you mentioned yesterday, debt holders will not forgive the debt. What I am predicting is that debt holders will not forgive debt, but RESTRUCTURE it, like they are for many different industries right now. (Imagine if they didn't and gov't owned banks took ownership of newspapers).
Add to this an economic uptick and ads rising on top of the new, lower cost base...you're off to the races, regardless of Google.
Yes, I think within the next year it will go to $8.50 and probably higher. The comps get progressively easier vs prior year, and the 4th q should see an uptick in ads from auto, banks, computers, and perhaps some regional and national department stores. Last year from Sept-December, the US was paralyzed in fear of the next great depression.
Things are getting slightly better and the cash for clunkers has put a lot of money in some people's pockets. If they spend it, the multiplier effect could be huge
Maybe you won't get out.... hence my comment about how I was reading your post. My 2011 notes were purchased years ago, not recently, so clearly no genius on this end of the discussion. B of A, I believe, is the lead bank to MNI... so I try to read their cards... continuing the gambling analogy. If you're investing... what do you think is the intrinsic value of MNI shares? Methodology? Thanks. Just trying to further the discussion.
Here's why you are MOSTLY WRONG with your Google "screed."
I did the below analysis for both GCI (detailed) and LEE. I didn't do it for MNI, but the point comes across VERY clearly, by looking at the first link below. (Where was Google's "damage" to GCI from 2001-2006?
Again I must take issue with your analysis. It's me again, ole grandiose newspaper guy.
Looking back at your post, with the history of gannett margins shows how bad the argument you make really is. The margin compression has been staggering. margins are way down from 2002 due to only two things.
1. The growth in revenue has slowed, and now turned negative.
2. Expenses have gone up while revenue has dropped.
Looking at profit margins, instead of total profit, can get you in a heap of trouble. margins mean little when your top line is being wiped out. Your analysis shows me that infact GOOGLE, and other internet companies, have had a HUGE IMPACT on profit margin. The $22,000,000,000 Google will sell this year has come out of Gannett's, and NYT, LEE and all other daily newspaper's available pool of ad dollars in the market. Thanks again for everything you do, helping me prove my point without even intending to do so.
You're the best, Longtimefollower.
Thanks for playing devil's advocate (though too late for me...I'm already deeeeeep into MNI Jan 2010 calls).
Hey, where do you get $1.35 pps from? Is that a valuation or from trading experience?
Are you long GOOG?
Do ad agencies trust internet figures nowadays? (I really don't know...haven't consulted in media industry in 7 years when internet ads were nascent)
Are we saying that subscriber fees need to mirror GOOG, so that the newspaper is free and ads are the sole revs? I'm seeing a lotta big cities try this (even on the print lines) with free newspapers on mass transit lines that summarize the Wash Post, etc.
On the cost side, are newspapers different than the BK industry precedents? Seems like capex would be much less of a constraint for Pruitt than for CEOs of auto or airlines.
Finally (and again, I really don't know the answer to this), but aren't newspaper reporters the main value-added for the media industry? I've seen dozens of local tv stations and hundreds of internet sites that did little more than paraphrase the morning's newspapers. Just seems like we are living in a knowledge economy and that newspaper reporting, specifically, underpins the whole thing...though I don't have the silver bullet for how to monetize the dynamic.
Thanks again for your industry expertise! It's really a pleasure to read your substantive discussions.
Here are my thoughts, for what they are worth.
Hey, where do you get $1.35 pps from? Is that a valuation or from trading experience?
Trading experience told me it was undervalued at 50 cents and overvalued at $2.50. Just an opinion of where I'd buy more to add to my position, which was trimmed 2 weeks ago at $2.31. My orders are in at $1.35 and if it dips there I am buying. if not, oh well.
Are you long GOOG? No, but I do believe Google will end up buying several newspaper companies to hire their reporters to help keep traffic going to their websites. The MSFT/Yahoo deal makes me believe this even more. Wish I would have bought some earlier this year at $250.
Do ad agencies trust internet figures nowadays?
Comscore tends to have the highest trust factor among media buyers from what I see. In-house traffic reports are sketchy at best and have high, unexpected and unexplainable blips. Too often, a company will change the reporting source of their internet traffic, usually with the new figures showing traffic substantially higher. This is hard to sell, and even harder to believe. MNI consistently states how their total reach has gone up when adding in the internet numbers. The big difference is, most people consume the news online, and pay little attention to the advertising next to it.
Finally (and again, I really don't know the answer to this), but aren't newspaper reporters the main value-added for the media industry?
I believe the brand name of many daily papers has some value left. Who writes the story, gathers, the info, edits the story has less value than the name on the masthead. That being said, newspaper have lost credibility in the eyes of many with their one-sided political views. Local news has value and that is slowly going away, which is truly sad.