A Business That Either Adapts Or Goes Away

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

Years ago, newspapers were as sure of a profitable idea as you could have. Before the Internet changed the way we get our information these were essentially monopolies. The main paper in an area got most of the advertising and was a must read by people every day. How things have changed. Today most newspaper publishers are trying to move into digital content to compensate for their slowing subscriptions. The industry is in a decline, and there is now a portion of the population that has never picked up a newspaper at all. I understand that both of the below companies own other properties such as internet sites and television stations, but in the end they are newspaper companies. The industry quite frankly either must adapt or disappear. 

With this backdrop let's look at two companies in this industry and see where they are now.

<table> <tbody> <tr> <td> <p><strong>Name</strong></p> </td> <td> <p><strong>Symbol</strong></p> </td> <td> <p><strong>Price</strong></p> </td> <td> <p><strong>P/E on '12 earnings</strong></p> </td> <td> <p><strong>Growth expected</strong></p> </td> <td> <p><strong>PEG</strong></p> </td> <td> <p><strong>Yield</strong></p> </td> </tr> <tr> <td> <p><strong>Gannett</strong></p> </td> <td> <p><span class="ticker" data-id="203647">(NYSE: <a href="http://caps.fool.com/Ticker/GCI.aspx">GCI</a>)</span></p> </td> <td> <p>$14.31</p> </td> <td> <p>6.48</p> </td> <td> <p>6.00%</p> </td> <td> <p>1.08</p> </td> <td> <p>2.24%</p> </td> </tr> <tr> <td> <p><strong>New York Times</strong></p> </td> <td> <p><span class="ticker" data-id="204787">(NYSE: <a href="http://caps.fool.com/Ticker/NYT.aspx">NYT</a>)</span></p> </td> <td> <p>$7.50</p> </td> <td> <p>11.03</p> </td> <td> <p>-1.00%</p> </td> <td> <p>-11.03</p> </td> <td> <p>0.00% </p> </td> </tr> </tbody> </table>

Clearly the market does not favor newspaper companies or their prospects. To give a little more perspective though, let's look at their cash flow and balance sheets. This might help us figure out if these companies have the financial ability to do anything about their predicament.


  • Positive average cash flow after capital expenditures and dividends of $143 million a quarter in the last year
  • Increased cash, increased equity, paid down debt in the last year

New York Times

  • Positive average cash flow after capital expenditures and dividends of $16.9 million a quarter in the last year
  • Decreased cash, decreased equity, paid down debt in the last year

When you really look beyond the initial numbers these two companies appear headed in opposite directions. Gannett on the one hand has the look of a growing company. They have significant positive cash flow, and have improved their balance sheet. By comparison, New York Times has barely positive cash flow and their balance sheet has suffered in the last year.

What can these companies do to survive and possibly thrive?

  • They have to understand that their user experience to obtain news has to be the best. There has to be a reason for people to check out usatoday.com (Gannett) or nytimes.com (New York Times). Look to Google and others for ideas and change these web sites to an electronic version of their newspapers.

  • Each company must change their business model to a part free and part subscription basis. Basic news such as headlines, sports information, market information, and the like should be free and advertising supported. Exclusive content that can be sold by subscription.

  • Use their cash flow to purchase profitable online properties. This diversifies their revenue stream, and allows them to leverage these properties to cross advertise.

  • Until these companies are more well diversified, they need to continue to shore up their balance sheets. Extra cash flow should be used to pay down debt and build up cash.

Looking at these two companies I believe that Gannett could prosper more than New York Times. New York Times offers an app that only shows main headlines, to get anything else you have to subscribe. Their cash flow is much lower and their balance sheet is weaker. Gannett has already started to make their flagship newspaper free with their slick USA Today app for iPad, iPhone, and Android. It's a one stop shop of news and makes catching up on what's happening enjoyable. Gannett also has the much stronger cash flow and balance sheet which makes me believe they have the change to do some transformative purchasing. I'm giving Gannet a thumbs-up and New York Times a thumbs-down on Motley Fool CAPS to back up my position. These two companies must adapt or disappear, the clock has already started ticking.

The Motley Fool has no positions in the stocks mentioned above. MHenage has no positions in the stocks mentioned above. 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.

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