Le Monde has been making headlines as well as writing them recently. France’s leading daily evening newspaper is haemorrhaging money and has only a few months to avoid bankruptcy. Many have interpreted this as further proof of the inevitable, slow death of print media in an online world. But in fact, Le Monde’s struggles come as other newspapers and magazines show some signs of fighting back.
The demise of printed news has been foretold since the arrival of the internet. Newspapers tried to embrace the digital revolution by placing their content online for free. But all that did was teach consumers to expect their news for free. Then came portable devices allowing people to access the internet from almost anywhere. Readers migrated online in droves and print circulation numbers tanked.
Then the ‘Great Recession’ came along. Advertising budgets, which account for 80% of most newspapers’ revenue, were slashed. The recession also pushed more classified advertisers onto free websites, such as Craigslist.org, which hit local newspapers especially hard. So it’s no surprise that recent years have seen a slew of prestigious newspapers on both sides of the Atlantic run into financial trouble.
In the US, Philadelphia Newspapers and Tribune Company, the group behind titles such as the LA Times, have been two high-profile casualties. In Britain, The Independent recently sold for £1 amid fears its falling revenues couldn’t support its rising pension liabilities.
So it’s no surprise that shares in listed newspaper groups have hit historic lows. Yet the blanket pessimism about the industry has left one or two bargains sitting on the shelf. What the market seems to have ignored is that while the industry is in flux and facing profound pressures, a few newspaper groups have shown an impressive ability to cut costs and change their product.
For example, large newspaper groups are pooling the creative workforces of local papers and sharing national and international content. This has enabled them to make redundancies and freeze pay, cutting wage bills, which are the industry’s largest fixed cost. US newspaper group The McClatchy Company cut payroll costs by 25% in 2009.
Paper is the second-largest fixed cost in the industry and luckily for print media the recession has seen prices fall. But newspapers have also taken steps to use less paper. An example in Britain is the compact format adopted by several daily broadsheets. This cost restructuring, which has probably been made easier by the belief that the industry is doomed, means that some newspaper groups continue to make healthy profits.
Perhaps more importantly, the decline in advertising revenues (AR) seems to have bottomed out. A recent forecast by international media agency Carat showed that in 2011 the global annual decline in print media AR would slow to 0.7%. That’s because a newspaper advertisement still has huge appeal for advertising agencies. A large newspaper group with a mix of national, regional and local titles gives advertisers more options when planning campaigns, especially when combined with a newspaper’s internet site. The physical presence of a newspaper is also an advantage. Studies show that the average reader will spend 30 minutes with a newspaper as opposed to 70 seconds on news sites. Given all that, some newspaper groups look cheap right now. We take a look at
one of the best bets below.
The best bet in the sector
One cheap, profitable newspaper group is US-based Gannett (NYSE: GCI). It owns leading daily USA Today, and 85 local and regional papers. This gives it an unrivalled combination of mass market and targeted coverage. It complements its local papers with a network of community websites. The group also has exposure to British local news through its ownership of Newsquest. Newspapers account for 73% of Gannet’s revenue. The rest comes from TV channels and standalone websites, such as CareerBuilder, the most popular employment website in America. The firm has cut costs by sharing stories between its national and local papers.
As a result, first-quarter earnings beat market hopes. Despite falls in circulation and AR, the firm grew Ebitda by 16% year-on-year. Gannett has also managed to pay off $1bn of debt since the start of 2009. Gannett has shown it can profit in the toughest conditions and its mix of local and national newspapers makes it one of the most likely to benefit from an upturn in the industry. Its strong balance sheet also gives it the financial muscle to experiment. On a 2010 p/e of seven, and a yield of 1%, it’s cheap compared to The New York Times (NYSE: NYT) on a multiple of 13. McClatchy (see above) too is on a p/e of seven, but can’t offer the same level of coverage to advertisers.