Newspapers stocks are not going to get bailed out by more chatter of LBOs or assets sales. Investors will continue to focus on deteriorating fundamentals, while trying to reconcile these results with current valuations, and the stocks will move lower. Accordingly, I continue to have a negative view on the newspaper publishers.
A Tribune LBO is not likely
Private equity players walked away from Knight Ridder and have shown little interest in the current list of newspapers on the market. Tribune is already levered at over 4x trailing EBITDA, leaving little leverage left to take out equity holders. Meanwhile, private equity firms continue to struggle to estimate what exit multiples might look five years from now. I think multiple contraction is obvious, making attractive returns elusive if not impossible for private equity players.
Selling Assets Appear a Better Idea on the Surface
Selling TV stations or newspapers at 13x while trading at 8.5 times seems like a slam dunk, but investors should be skeptical of "historical" private market values and wary of potential tax leakage from asset sales.
First, the market seems to be flooded with traditional media assets for sale. New York Times is selling its broadcast group. Dow Jones recently put it's Ottaway newspaper group on the block, and Journal Register is trying to delever by selling newspaper assets as well. Second, the traditional buyer of these assets (publicly traded newspaper and broadcasting companies) all seem to be net sellers these days, resulting in a supply/demand imbalance that will likely hurt asset pricing. Third, the threat of an economic slowdown with lead to cautious bidding by potential buyers. Lastly, most of the assets for sale have a very low tax basis, leading to very high tax payments on whatever gains are achieved, limiting their impact on the stock.
While there may be money to be made trading around TRB, I think a simpler investment strategy is to avoid these more controversial names in the group and look for names where investors are focused on operations.
Investors are Focused on Fundamentals, and they're Not Pretty
The problem with newspaper company stocks is simple: cash flow growth is non-existent, and multiples remain too optimistic. The resulting combination of cash flow multiple compression and reductions in consensus cash flow estimates will continue to drag these stocks lower.
Despite the secular threats and the pathetic operating fundamentals, the group still trades basically in the middle of their long term EBITDA multiple range of 7-11X. I would argue this range should be closer to 4-6x based on existing growth rates.
Classified advertising is just starting to show signs of rolling over and when this category does, estimates will be coming down quickly. Classified advertising likely boasts 65% EBITDA margins, so any weakness here will be extremely painful.
I would focus my attention on companies that are less likely to have major asset sales, be a likely take-out candidate (because too big, or too stubborn), or are located in especially soft markets.
Accordingly, we remain short:
1) Gannett (NYSE:GCI) - trading at a seemingly reasonable 7.7x '07 EBITDA - too big to be taken out and focus of investors seems solely on fundamentals. EBITDA has barely budged in the past five years.
2) New York Times (NYSE:NYT) - trading at a 8.4x '07 EBITDA - experiencing difficult times in larger markets, Sulzberger family controls the vote and will never relinquish control, and questionable senior management team.
3) Journal Register (JRC) - trading at a 8.0x '07 EBITDA - the worst geographic exposure of any major newspaper group, with large percentage of circulation coming out of Michigan and Ohio. A highly levered balance sheet limits options.
The bright spots in the newspaper world are companies that have other business segments that are showing real growth. Scripps (NYSE:SSP) - trading at 9.1x 07 EBITDA with its cable networks (HGTV, Food Network, etc) and online exposure (Shopzilla.com, uSwitch.com, etc) seems very well positioned, generating 10% EBITDA growth. Washington Post Company (WPO) - trading at an attractive 7.7x '07 EBITDA also has a more attractive growth profile with its education business and cable operations. We have been long these names, pairing them with the GCI, NYT and JRC shorts.