As Newspapers Fall, Content Is King
Timothy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The internet has forever altered countless industries, none more so than the newspaper business. Traditionally relying on advertising for the bulk of revenue, declining circulations have caused many newspapers to fold and others to suffer financially. But what's dying is the medium on which the news is delivered, not the content itself, and the companies which can successfully monetize digital distribution of their content will be able to not only survive but thrive. Even as technology continuously changes our way of life quality journalism will always be in demand. I believe that The New York Times (NYSE: NYT), one of the most recognized and respected news brands in the world, is one of the companies making the changes needed to be successful in the future.
A drastic change
In 2011 The New York Times put up a paywall on its website, allowing visitors to only view a small number of articles each month unless they pay for a digital subscription. Due to this new source of revenue 2012 was the first time in the 162 year history of the company that circulation revenue surpassed advertising revenue. Digital subscribers totaled roughly 640,000 in 2012 compared to a total circulation of 1.67 million on weekdays and 2.14 million for the Sunday edition. Also of note is the 29 million unique visitors to the New York Times website each month, making it one of the most visited newspaper sites in the United States.
These numbers show that people are willing to pay for the content which the New York Times produces. Even with the abundance of free information on the internet the quality journalism of the New York Times gets people to open their wallets. The companies which do well in the future will be the ones with both the broadest appeal and highest quality content. A third-rate paper in a city that no one can point to on a map is going to have a tough time getting anyone to pay for their content.
The New York Times’ main competition are other well-known papers, such as the Wall Street Journal and USA Today, along with all of the free sources of news on the internet. The WSJ is owned by News Corporation (NASDAQ: NWSA), a company which owns a vast assortment of media properties including newspapers, magazines, radio stations, TV and film studies, and internet properties. The Wall Street Journal has implemented a paywall as well, and with a larger print circulation than the NYT and 130,000 iPad subscribers alone the WSJ is a formidable competitor.
USA Today is owned by Gannett (NYSE: GCI), another media conglomerate with a host of properties. USA Today currently does not have a paywall in place and apparently doesn't plan on one in the near future, but many of Gannett's other papers either already have one or are planning to implement one in the future.
The NYT is for the most part a pure-play newspaper company while News Corporation and Gannett are diversified media conglomerates. In 2012 the NYT sold two properties, About Group and Regional Media Group, leaving the company with only two divisions, the New York Times Media Group and the New England Media Group. The New York Times Media Group contains both the NYT and the International Herald Tribune, which will be rebranded as the International New York Times in 2013. The New England Media Group contains the Boston Globe and related properties, and the company has recently stated the intent to sell this division. This will allow the NYT to focus on a single brand.
The asset sales in 2012 bolstered the NYT's balance sheet significantly. At the end of 2012 the company had $955 million in cash and investments and only $697 million in debt. The sale of the Boston Globe should make the balance sheet even stronger.
One item which is concerning, though, is the company's pension obligations. Total benefit obligations total $898 million, down from $984 at the end of 2011 due to a large payment during the year. This is a huge obligation for a company with a market cap of just $1.4 billion and makes the balance sheet much more muddled. If we count the pension obligations as debt then the company has about $4.21 of net debt per share.
The net income reported for 2012 includes the sale of assets and pension payments which need to be backed out to get a reasonable number for profits. Operating profit was $159.7 million for the year before interest or taxes. After $62.8 in interest expense this drops to $96.9 million. The company had a 39.3% tax rate in 2012, so after taxes the profit drops to $58.8 million. This is roughly $0.38 per share.
Since I'm counting the debt of $4.21 per share directly I'll add back tax-adjusted interest. This brings the unlevered profit to $96.9 million, or about $0.64 per share. With a market price of about $9.60 per share adding the net debt to this yields $13.81 per share. This is the number I prefer to use instead of simply the share price since it accounts for the debt. The company is therefore trading at 21.5 times the unlevered profit. Think of it this way - if you bought the company and paid off all of the debt and pension obligations your total cost would be 21.5 times the unlevered profit.
Although comparing the NYT to News Corp and Gannett may be apples and oranges, all three companies trade at fairly rich valuations. News Corp trades at nearly 18 times TTM earnings. Gannett trades at just 11.4 times TTM earnings but profits have been on the decline for quite some time. Gannett also has a net debt and pension obligation of about $2.6 billion compared to a market cap of $4.7 billion, making that valuation seem quite unattractive.
The Bottom Line
I like the company and I like the path they've chosen but the price seems far too high. The company is in the middle of a transition and it's unclear what profits will look like over the next few years. The shrinking advertising revenue will be offset by the increasing digital revenue, but it may be some time before the company sees sustainable growth. Although I'm optimistic about the company's future I don't expect it to grow at a rate sufficient to justify the valuation. In a few years this may change, but right now the stock is just too expensive. I'll definitely be watching it though.
Financial data from 10-K
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