Around the turn of the century, Warren Buffett damned media companies by saying something like,"If you had known about the internet, would media companies be worth anything?"
A decade or so earlier, the same Warren Buffett had characterized media companies as "franchises" that could grow perhaps 6% a years "without the investment of additional capital;" i.e., whose "autonomous" growth rate was in the mid single digits, because of pricing power.
Neither view was correct. They appear to stem from Mr. Buffett's preference for "good" economic characteristics (moats) over bad ones (heavy competition). And it is true that media companies were worth more in 1989 than in 2009.
But SOME users will prefer print or broadcast media over internet applications in 2009, meaning that old media companies have some value, even today. And Marc Gerstein (our former boss at Value Line, whom we follow) pointed out around 1990 that human beings have only two eyes and ears and 24 hours a day, meaning that there was a practical upper limit for media prosperity.
We can almost hear old Ben Graham saying: "That young Buffett (his former student), likes good companies and dislikes bad companies, REGARDLESS OF PRICE."
One media company that we like is Gannett Corporation (GCI) .The book value is four dollars and change. The dividend is four cents a quarter 16 cents annualized, for nearly a 4% yield (even after having been slashed 90%). Our proprietary investment value metric (book value plus ten times dividends) is around $6. Yet the stock, at three dollars and change, is selling for barely more than half that.
Gannett sees itself as a media company, which is to say that it is slowly but surely making a transition to an online world through internet advertising.
Meanwhile, it operates 23 TV stations. Gannett is still trying to shake off its image as a "newspaper" company, however, although its flagship is the USAToday.
The company should earn about $1 dollar a year. That's about a quarter of its peak, but the stock is off its peak by much more: It's at a quarter of a quarter of its former value, leading to a forward P/E ratio of under 4, in line with other media companies. The return on equity (ROE) would be over 20%.
"Cash flow" (earnings plus dividends) is closer to $2 a share, leading to a cash on cash return on equity of nearly 50%. Newspapers provide much of this cash, but is receiving little investment, which, instead, is going into smaller but faster growing businesses.
Advertising revenue is down, but not out, but higher newstand prices of papers partly make up for it. Gannett, like other newspapers, is in something of a "royalty trust" (liquidating asset) mode, but even royalty trusts are worth owning at some price.
Given the above parameters, the stock could be worth a bounce to the $8-$10 range if the company either succeeds with its new business development efforts or is taken over. At $3 and change, the downside (to a royalty trust valuation) seems to be limited.
The debt to equity ratio, of around 4 to 1, is higher than we would like to see. But it is worth noting that the shareholders' equity number is a reasonably "hard" number, having mostly been written down (for the impairment of acquired assets) in recent years.
