When Warren's Wrong

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

Warren Buffett is the investing guru of this century and last century. However, there is one stock he owns that makes me wonder, what was Warren thinking?

Washington Post (NYSE: WPO) obviously has some sentimental value for him. It's sentimental for me, too as I used to work for them and I loved every single minute of it. But that doesn't make me want to hold the stock.

Mr. Buffett has a thing for newspapers and despite every other clever and prescient stock he's picked he still loves newspapers despite the fact that the daily print newspaper for all intents is as cooked as a Christmas goose. Paywalls and online membership models (for Slate and other blog sites) just aren't enough to turn the tsunami of alternative news sources away.

Owning a newspaper, even a money-losing one, used to be a badge of prestige and power. It was a sign that you had arrived as a power broker with influence. Mr. Buffett is sentimental about his newspapers much the same way he is about his railroads. He bought his hometown paper, the Omaha World-Herald, in 2011 but this was as much to keep an independent newspaper afloat, serving Omaha almost as a utility or public service.

Don't Give It Away

Although Mr. Buffett is the Washington Post's largest stockholder with 1,727,765 shares and is an advocate of paywalls, saying earlier this year, "You shouldn't be giving away a product you're trying to sell," CEO Donald Graham had until very recently been adamant that a pay for access or metered model like that of the New York Times (NYSE: NYT) wouldn't work for The Washington Post. Unofficial news reports claim that the Post will start a metered access model by the summer of 2013.

CEO Graham  must have studied his own presentation at the UBS Global Media and Communications Conference in early December in which the lone bright spots for the newspaper are online ad revenues rose by 13% in Q3 2012 compared to an 11% decrease for print ad revenue in the same period and page views for washingtonpost.com increased by 35%.

While Berkshire Hathaway stockholders may indulge some of Mr. Buffett's whims, investors in the Post shouldn't. They should try to carry this great newspaper screaming and kicking into the 21st century before it's too late as it seems to be in the case of Newsweek, now just a digital skeleton. Gannett (NYSE: GCI) (full disclosure, I also worked for a Gannett newspaper) has had digital pay for access for years to most of its chain of 80 newspapers. There is no denying that the era of the powerful, throbbing big city daily is over, with most major cities' evening daily gone for good and the single remaining daily struggling for relevance and profits: Seattle, Cincinnati, Baltimore, Denver, Tuscon. I could go on but it's just too sad -- already so many co-workers and industry friends have had to take proffered buyouts, if they were lucky. If not, an entire career CV is now worthless.

The Post does have some businesses buttressing its newspaper: Kaplan test prep, CableONE service provider business, six TV stations, and Kaplan for-profit education, but none of these are making enough money to offset the doubling of newspaper revenue losses to $56 million in 2012. Enrollments in Kaplan education are declining as the entire for-profit education sector is troubled. Cable One has less than 1.3 million subscribers having attracted less than a thousand new subscribers from Q3 2011-Q3 2012. The only real moneymaker on a growth basis is the Post-Newsweek station division with a 44% increase in revenues from Q3 2011.

For competitor Gannett, best known as the publisher of USA Today, the picture is decidedly brighter. At the same UBS conference they announced the rollout for full pay digital access subscription is available across 78 local newspapers. Gannett Broadcasting is benefiting from 2012's political ad spend and from the Olympics and their Digital Marketing Services is seeing good numbers from Careerbuilder.com. Overall, digital revenues were expected to increase 19% over this last year. Even better is the $20 million in revenue generated by digital subscription is expected to quadruple in 2013.

As a stock, Gannett is not such a bad idea with a 10.15 P/E and a forward P/E of 8.34 as well as a yield that ranges between 4.70 and 4.40%. It is already up some 40.62% over the last year but growth going forward is still expected in the mid single digits.

Gannett, which was widely reviled for its USA Today format over two decades ago, made a bold move then and has made the sane move now to paywalls. Even the Grey Lady, the New York Times, bowed to the trend as did the Wall Street Journal, owned by Rupert Murdoch's NewsCorp.

Is The Washington Post too late to the paywall party? Considering the accelerating revenue losses it's arguable they are. But if implemented sooner rather than later they may eventually be able to make up some of those losses. As it stands right now they have a 11.60 P/E and a 2.70% yield.

Final Edition

Do you buy the Post? Should Warren keep it? Price to book is at 1.04 but the company's stock is only up 1.93% over 52 weeks. As Belle Watling says in Gone With The Wind, another tale about a dying era, "It pleasures me none to say it,"... but no, don't buy it, it's an industry in its death throes. Even its auxiliary businesses are underperforming except for the six TV stations.

Gannett and NewsCorp have other businesses that are largely outperforming and their newspapers are doing much better. Mr. Buffett will probably keep the Post in his portfolio. He's not sentimental about most of his holdings but I think he honors a Golden Age of journalism from owning it. You probably can't afford to.

 


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