What Do Newspaper Companies Need To Do To Survive?

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Gannett (NYSE: GCI) has been an interesting company to follow in recent weeks. On June 13, the company announced its intention to acquire Belo Corp. (NYSE: BLC) for $2.2 billion, which caused Gannett’s shares to spike by 25% on optimism that the company is finally admitting to itself that print newspapers are a fading business on their own. Since that announcement, shares have pulled back by over 10% now that the initial excitement has faded. Is this an opportune time to get in on an evolving company, or a good time to take our money and run from a dying industry? Also, are Gannett’s competitors in the same boat or would they make better investments?

Gannett’s newspaper business

Gannett’s newspaper operations are and will continue to be a major aspect of the company’s identity. While there is absolutely no question that print news is declining, both in terms of overall readership and ad revenue, there is no doubt in my mind that print news will always have some place in the market. 

Both revenue and profits are falling in Gannett’s newspaper business. In 2007, newspapers made up 88% of Gannett’s total revenue, and by last year that had dropped to 70%. More alarmingly, the newspaper business is down to just 45% of the company’s earnings, meaning that profit margins from this line of business have sunk tremendously. 

Gannett publishes about 100 daily newspapers and 500 non-dailies. This total includes USA Today, which is the best-selling daily newspaper in the U.S. Gannett has been gradually shifting its content delivery to a digital model, and has increased print subscription rates. The challenge over the coming years will be to not only figure out the place of newspapers in the current digital age, but to figure out how best to interconnect the newspaper business with other media to maximize profitability.

Broadcasting: the future of Gannett?

Gannett really changed the market’s attitude with its announcement of its intended acquisition. Currently, Gannett’s broadcast segment consists of 23 network-affiliated TV stations which derive their revenue from both local and national advertising. Belo owns 20 television stations, also mainly local affiliates of ABC, NBC, CBS, and FOX. The acquisition, which effectively doubles the size of Gannett’s broadcast segment, is expected to close by the end of 2013, and would cause the broadcast segment to surpass the newspaper business in terms of revenue and earnings. 

It’s so cheap, betting on a turnaround may be worth it

Gannett currently trades for just 10.8 times this year’s earnings estimate of $2.21 per share. The consensus of analysts projected $2.48 per share next year, not including the recently-announced acquisition, which should add a considerable amount to this figure. Before the merger, Belo was projected to earn $1.04 per share for 2014, and based on the number of outstanding shares, this translates to $99.4 million in profits added (in theory) to Gannett’s bottom line, or about 43 cents per share based on Gannett’s current share count. In other words, even after the recent gains in share price, Gannett could be trading for just 8.2 times next year’s earnings, provided the acquisition closes as planned.

Alternative: New York Times

The New York Times Company (NYSE: NYT) publishes one of the most well-known newspapers in the world, and also operates the website NYTimes.com. The company charges for content on its website in addition to collecting ad revenues. Speaking of ad revenues, about 24% of the company’s ad revenues are now from digital media, up from just 12% in 2006. The New York Times has an average circulation of almost 1.7 million people for weekdays, of which 640,000 are paid digital subscribers.

Although the company has been somewhat successful in monetizing its online content, the company is still experiencing declining revenues and earnings. In fact, the last time the company posted an annual revenue increase was in 2005. While I believe that low expectations have been priced into the stock, I still don’t think that New York Times has done what it needs to successfully adapt their business model to the current environment, like Gannett seems to be more successful at doing.

Final thoughts

As far as this sector goes, although I like Gannett, I still advise readers to tread cautiously. However, for those with a relatively high amount of risk tolerance, there could be great gains to be had if Gannett is successful in the transition of its core revenue stream to broadcasting.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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