Can This Newspaper Publisher Transform Itself into an Online Media Giant?
Ted is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Regardless of which company you look at, nearly all publishing companies look downright cheap compared to historical performance. That's what happens when an industry is in decline. Newspaper publishers in particular are scrambling to add a digital component to their offerings as a last-ditch effort to save the business. Shareholders of most of these companies would be better served if the company were closed down and liquidated.
However, it's hard to just shut down a company like the New York Times (NYSE: NYT) or Washington Post (NYSE: WPO). The same goes for many of the publications owned by News Corp (NASDAQ: NWS) and especially one owned by Gannett (NYSE: GCI) -- USA Today. So, we prospective investors must go forth with the understanding that these papers will not shut down until their creditors shut them down.
Of the four companies, Gannett looks the most interesting from an investing standpoint. It consistently earns a much higher free cash flow margin than the other three companies. This is because most of its local newspapers effectively have a monopoly in their respective markets.
If you think about it, not many cities are large enough to support more than one major newspaper, so the major newspaper in town has an enormous advantage over upstarts. The result is that new entrants simply do not exist in most of Gannett's newspaper markets.
Or at least that was the case in the 20th century. Now, with information readily available to users on the internet free of charge, newspapers' monopolies are turning out to be less valuable than in the past. Advertisers are moving away from print advertisements toward more targeted eyeballs on the internet. In addition, readers are growing accustomed to getting their information for free, which is hurting subscription revenues.
But Gannett has room to lower newspaper subscription prices; newspapers really make most of their money from advertisements, so losing subscription revenue is not a business-killer. Losing advertiser revenue, however, is.
To combat the drop-off in print advertisement spending, Gannett is making investments in digital media properties. There is tremendous competition in online news and Gannett has yet to prove itself in this new arena. However, it should retain a similar monopoly-like position in its local markets if it can successfully roll out its online strategy for local papers.
The company has a few different businesses, including a terrific broadcasting segment and CareerBuilder.com -- the largest job listing website in the world. It also owns USA Today, the nation's second-largest newspaper. However, none of that will matter if the company cannot successfully transition to the internet.
Gannett looks incredibly cheap if you look at historical cash flows. Over the last three years, Gannett averaged $748 million in free cash flow. At a 10x multiple, you get a value of $32 per share -- significantly higher than the company's stock price of $19.29.
However, the company has been cutting revenue and slashing costs for several years and is unlikely to average anything close to $750 million in free cash flow in the future.
If instead you model revenue declining to about $4.5 billion and a free cash flow margin of 11% (down from the company's historical average of just under 15%), then you end up with average free cash flow of $495 million. At a 10x multiple, that cash flow is worth only $21.21 per share.
And I'm not certain my revenue and margin projections may not be conservative enough; I could easily see the company dropping to 'normal' revenue of only about $3 billion, which would make the stock look overpriced.
However, if Gannett can replicate its offline success on the internet, then the stock is a screaming buy. It already has a great position in its local markets, so capitalizing on that position online is not out of the question. However, I usually stay away from companies undergoing significant change, so I'm going to sit this one out until it becomes clear that Gannett can execute.
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