There are Reasons Warren Buffett Buys Community Papers and not The New York Times
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Always a great paper, The New York Times (NYSE: NYT) has been a lousy investment. The publisher of both The New York Times and The Boston Globe, The New York Times, at around $7.80 a share, is well below the $21 mark it traded at in 2008 before the onslaught of The Great Recession. For the early 2000s, The Great Recession was around $50 a share.
Always a great investor, Warren Buffett loves newspapers. He reads several a day and used to be a paper boy. He bought shares of The Washington Post (NYSE: WPO) for the portfolio of Berkshire Hathway. In 2012, Buffett has bought more than 60 newspapers for Berkshire Hathaway, most from the holdings of Media General (NYSE: MEG).
All have been community newspapers, none even approaching the national and international stature of The New York Times or The Washington Post. Looking at the financial performance of The New York Times, there is a reason for that. It also explains why the portfolio of Berkshire Hathaway is bulging with local dailies, not big city publications that offer more prestige than profits.
Ten years ago, The New York Times Company made $300 million on revenue of $3.1 billion. Last year it lost $40 million on revenue of $2.3 billion. As an indication of how investors measure the value of The New York Times as a publicly traded media concern, its market cap is $1.1 billion against revenue of $2.3 billion in 2011. Demand Media (NYSE: DMD), described by one analyst as a "low-brow content aggregator," not exactly "The Paper of Record," as The New York Times has been deemed, has a market capitalization of $865 million against 2011 revenue of $325 million. Like The New York Times, however, Demand Media is unprofitable, as it lost $13 million last year.
Unlike Demand Media, The New York Times still relies on its print edition for the bulk of its revenue. For whatever reason, the transition to the internet passed it by. This was not missed by Wall Street, however, as over the course of the rise of the internet, share prices of The New York Times have fallen from around $50 in the early 2000s to under $8 today. The advent of online media has not treated "The Old Gray Lady" well.
Not all newspaper publishers lose money, however. Gannett Company (NYSE: GCI), which publishes 82 local dailies like the ones Buffett just purchased from Media General, has a profit margin of 8.65%, an operating margin of 14.76% and a price-to-sales ratio of 0.64. As Buffett cherry picked the best papers from the holdings of Media General rather than investing directly in Gannett Company, it can be assumed that these periodicals had better financials.
The New York Times, by contrast, is losing money with a negative profit margin of 1.44%. Its operating margin is a negative 0.24%. While the price-to-sales ratio for The New York Times is healthy at 0.51, that is a function of the collapsing share price, as sales growth is off on both a quarterly basis and for the last five years. In addition, The New York Times is a company loaded down with debt. Its debt-to-equity ratio is 1.40: That means that it required $1.40 in borrowing to produce every dollar in equity value (another repelling factor here: Buffett hates debt).
In addition to having better income statements and balance sheets, the community newspapers bought by Buffett have a number of very significant advantages as operating businesses over The New York Times . Each holds a primary position in the service area. As Warren Buffett has stated, “In business, I look for economic castles protected by unbreachable ‘moats’." While it might be called "The Paper of Record," The New York Times is not even the #1 daily in the New York City region.
Many of the newspapers Buffett bought are close together geographically with strong online operations. That will create profitable synergies, particularly for the classified sections and in advertising. This will maximize revenues from these activities. The New York Times is weak in all of these areas.
There will be tremendous cost savings, too. The most expensive item for newspapers, particularly ones like The New York Times and The Boston Globe, is personnel. But for community papers, a major story like an election does not need a different reporter traveling around the country with the candidates. Wire stories can easily suffice. Being online saves money too, as pulp for the papers is the second biggest cost for a publication.
For its most recent earnings, The New York Times reported an increase in its digital subscription base from 472,000 to 532,000. That could be due to more people wanting to follow the presidential election and a special offer it has been running (full disclosure: just received it and did not bite). There was a second quarter loss from continuing operations of $0.57 a share. The operating income included a $0.85 non-cash write-down for About.com. Without this line item, earnings would have been reported at $0.14 per share, a year-over-year increase of $0.03.
The New York Times has a mean analyst target price of $7.71 for the next year. Its mean analyst rating is negative at 3, as 1 is a Strong Buy and 5 is a Strong Sell. For profitable community newspapers, however, the big headlines is that Warren Buffett, "The Oracle of Omaha," is buying.
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