Media companies can’t get rid of their publishing divisions fast enough. Yet investors can’t get enough of publishers’ stocks. So what’s the real story here?
Are newspapers and magazines a doomed, anachronistic business? Or have the surviving publishers found some equilibrium, learning how to get paid for digital content, driving down expenses, pivoting toward the broadcast business and harvesting value from New Media investments? Probably a bit of both.
The headline-nabbing performance of publishing stocks has also benefited from investors’ hunt for unloved and under-owned ideas, expectations of further industry consolidation and the fact that they had gotten so depressed over the prior five years or so. Most of the stocks leading the sector higher also own television stations, whose implicit value has surged based on recent transactions.
Shares of USA Today publisher Gannett Co. (GCI), domestic-magazine publisher Meredith Corp. (MDP), Midwestern newspaper and TV-station owner E.W. Scripps Co. (SSP), the New York Times Co. (NYT) and TV, education-services and television player Washington Post Co. (WPO) are each up more than 30% so far this year, more than 10 percentage points ahead of the Standard & Poor’s 500 index and more than the media sector as a whole.
On the more speculative end, newspaper publisher Lee enterprises Inc. (LEE), which counts among its investors Warren Buffett – whose Berkshire Hathaway Inc. (BRK-A, BRK-B) has bought a number of small-market newspapers lately – has soared 125% this year from distressed levels.
Meantime, big diversified media companies are hustling to wash the ink off their hands, so to speak, hiving off traditional print publications as growth-starved stub businesses.
Rupert Murdoch’s conglomerate last month spun off “new” News Corp. (NWS, NWSA), housing Dow Jones and its U.K. and Australian newspapers, from what is now known as Twenty-First Century Fox Inc. (FOX), made up of cable-TV and movie units.
Time Warner Inc. (TWX) Monday named a new CEO for its storied Time Inc. magazine division in preparation to spin this publisher of Time, People, Sports Illustrated and Fortune to shareholders later this year. And Tribune Co., which emerged from bankruptcy protection late last year, just agreed to buy a chain of TV stations for $2.7 billion, casting its lot with local broadcast media. The company also plans to slough off its newspapers, including the Los Angeles Times and Chicago Tribune.
Barclays Capital media analyst Anthony DiClemente notes that the investor meeting for the new News Corp. was “packed,” an anecdotal indication that fund managers crave reasons to get involved in the sector.
A series of factors
DiClemente attributes the heady run in publishing stocks to a series of factors, namely the stretch to find under-exploited stock ideas with indexes at a record high and expectations of more financial engineering to come, including consolidation and further spinoffs.
DiClemente says investors are also recognizing that digital-subscription and ad revenue is beginning to offset the loss of print-publishing revenue in the U.S., as consumers get used to the idea of paying for proprietary online information. Finally, the burgeoning value of television stations, bolstered by new revenue streams from cable carriers paying to retransmit their signals and heavy political advertising, is pushing publishing stocks higher.
Indeed, the going multiple for local-TV affiliate businesses is around 8-times cash flow. Gannett last quarter pulled half of operating income from TV, so with the stock trading around 6.5-times cash flow, it suggests a modest 4-to-5-times multiple on the newspapers. That’s not much more than Buffett has paid for his recent newspaper acquisitions. This helps explain why a sizable profit shortfall by Gannett Monday led only to a 2% dip in its shares despite their having been sent aloft by 45% in 2013 ahead of the report. Gannett, too, doubled down on TV by agreeing to buy Belo Corp. (BLC) last month, fueling speculation that it, too, will separate its newspaper operations.
Scripps gets closer to 75% of income from TV, underpinning its 7.3-times cash-flow multiple. Washington Post’s cable and broadcast-television assets produce more than 100% of profits, more than offsetting the loss-making education unit and the Washington Post newspaper, which increasingly appears to be a Graham family vanity asset.
The New York Times shares, recently at a 52-week high above $12, have been trading in large part based on the imputed value of its Midtown Manhattan headquarters building – value that couldn’t easily be realized for years given a sale-and-leaseback arrangement in place. DiClemente’s Barclays colleague Kannan Venkat this month downgraded the stock to the equivalent of a Hold rating, asserting that its huge run this year more than reflects some digital-growth initiatives and the beneficial effect of higher interest rates on the Times’ heavy pension liability.
The bottom line, then, is these publishing names have been flying mostly despite, not because of, their core print businesses, in an apparent arbitrage to price in the rich prevailing numbers being paid for TV stations and urban commercial real estate.
These companies have proven they are on their way to figuring out how to stay viable in the digital world, but at these prices the stocks are no bargain, and are keenly dependent on more deal-making and an abiding affection among investors for plain old local-TV stations.