Value can often be found in industries that are undergoing a radical transformation. In any situation where the status quo is upset, many investors often get nervous about the companies they hold and elect to divest during periods of change, bad press or fears of obsolescence. Nowhere has this become more apparent within the past decade than in print media, publishing and advertising. Digital and mobile advertising have rapidly moved to displace more traditional mediums and many well regarded periodicals have shifted entirely towards the digital realm.
Despite the fact that there has been a cloud of investor pessimism regarding more traditional forms of media, there is also a significant minority of investors who believe in their continued value. Warren Buffett has recently acquired numerous assets in regional papers for Berkshire Hathaway (BRK.A) (BRK.B), adding to the already robust media holdings of the legendary conglomerate. In this article I will be discussing three media companies that I believe offer value, either by virtue of their current position, the potential of a catalytic special situation or the combination thereof. Two are large companies and one is small.
They are, in order of size...
Thomson Reuters (TRI)
Reuters is a huge company, with a market capitalization slightly north of $25 billion. In addition, the company is far from a traditional media outfit as it has a significant presence on the web and provides data analytics to businesses, governments, individuals and professionals. The company also furnishes a very healthy dividend, currently at 4.17% and has increased its dividend on regular basis. TRI is also valued fairly in my opinion - currently priced at $31.20 against $20.73 of book $1.66 of cash per share. In addition to its news business, the company also has a Tax and Accounting, Legal services and Property and Science which divisions which produce support software critical to the operations of other companies and firms.
One of the most interesting divisions of Thomson Reuters to me is its legal division because of one very important asset: Westlaw. Westlaw allows a single attorney to research electronically, scouring thousands of cases with the click of a button. In a profession that often bills by the hour, time is of the essence and the service is essential. Westlaw is also extremely expensive, and its only major competitor in the field is LexisNexis. From discussion with my friends working at law firms and in law school, the primary consumers of Westlaw's services, Westlaw is the "Coke" to LexisNexis's "Pepsi" - meaning the preferred brand in an albeit close race. The company's recent acquisiton of the Practical Law Group is also interesting to me, and indicates the implementation of a growth strategy in the legal services sector designed to harness the advantages of technology solutions applied to the legal industry.
I believe that there is also the possibility of Thomson Reuters electing to spin-off one of its divisions in the near future, following suit with another media giant, News Corp (NWSA) which recently announced a spin-off of its publishing section that includes the Wall Street Journal. If a similar situation were to occur with Reuters, I would be very interested in the prospect of acquiring shares as I believe Westlaw represents a highly desirable pure play in the legal services sector.
The largest division of Thomson Reuters, the Financial and Risk division, has also recently entered into a period of consolidation with the announcement of layoffs due to disappointing performance. I believe that if Financial and Risk continues to struggle, there could be the impetus for catalytic events as the company attempts to refine its positions and focus on profitability, either through spinoffs or a special dividend paid to shareholders through the liquidation of certain underperforming assets.
Gannett Company (GCI)
In the United States, the assets of the Gannett Company are ubiquitous as the company is responsible for some of the largest daily circulation of newspapers in America. The company's flagship national paper, USA Today, is assuredly familiar to American readers. In addition to a national newspaper, the Gannett Company holds numerous regional newspapers, broadcast stations and has more recently invested in the development of a digital media asset division in an attempt to adapt to the rapidly changing landscape though its effectiveness remains to be seen.
During the financial crisis of 2008 - the stock suffered heavily, falling to under $3 per share. The company also slashed its dividend during this period by a factor of 10, from 40 cents per share to 4 cents. Despite the pressures of the crisis, the shares of Gannett have steadily rebounded, with the company now priced at $21.64 per share and having increased its dividend to 20 cents per share - representing an annual yield of 3.68%. The company currently has assets of $10.22 plus $0.76 of cash per share, and with a market cap of $5 billion, has Free Cash Flow to Market Cap multiplier of under 10, with FCF of $648 million, a valuation that I find attractive. As with Thomson Reuters - I am also watching Gannett for the possibilities of a spin-off - either through its broadcast communications or publishing division.
A.H Belo (AHC)
The smallest of the bunch, A.H Belo was recently spun off from the Belo Corporation and publishes several regional newspapers including the Dallas Morning News. Currently priced at $5.38 against $4.64 in assets and $1.55 in cash, with an annual dividend yield of 4.46% I believe that the A.H Belo Corporation has the potential to be an excellent value. Though only recently spun off from its parent company, the Belo Corporation (BLC) which is now a pure play in broadcast television (which I believe carries the potential to be an inherently attractive investment as well) it is also important for potential investors to exercise caution when making purchases of companies that have only recently returned to profitability - especially when they are in a rapidly changing industry.
I think that Thomson Reuters is a very interesting stock to hold at this point, given its reasonable valuation, attractive dividend and the potential for catalysts involving spinoffs or special dividends. Gannett Corporation is also a compelling purchase in my mind, given the growth potential of the company's media unit and the potential for a separation of its publishing and network businesses in addition to a dividend which I hope will continue to increase (having advanced five-fold from 4 cents in 2008 to 20 cents currently). For investors that elect to purchase shares in A.H Belo at current prices, I believe that there is a healthy margin of safety when comparing the assets plus cash, healthy dividend yield and lack of debt against current prices - especially if the company is able to return to continued profitability after a series of disappointing years.