The New York Times Company - A Hoary Relic, Or Just Overvalued?

Jun. 9.14 | About: New York (NYT)

Summary

After a string of disastrous acquisitions, the New York Times is financially stable.

The company is however now priced as a high-growth company, which it is not.

The company's revenues are persistently flat, with key segments such as advertising continuously eroding.

The New York Times Company (NYSE:NYT), a news and print media conglomerate founded in 1896, continues to struggle in its efforts to adapt to the digital age. Investors have recently showed some enthusiasm for the company. The stock has increased in value 43.42% during the past yearly period, from USD$10.29 per share on June 7, 2014 to its closing price of USD$15.16 per share on June 6, 2014.

Is this enthusiasm justified, or are investors overpaying for a company with a recognizable brand name, but whose management has in the recent past made several notable mistakes? The company's financial reports indicate that, while the company is marginally profitable and has a stable balance sheet, its current performance and likely prospects have a long way to catch up with its current stock price.

Modest Profitability; a Meager Dividend

After some periods of unsettling losses, the New York Times is now profitable, although such profits are relatively modest in view of the company's resource base. Its profitability is moreover somewhat inconsistent, as further detailed below. The meagerness and instability of the company's profits reflects the continuing erosion of its traditional print media-based revenue sources, coupled with management's persistent failure to fully compensate for this decline through online-based initiatives.

For the first quarter of 2014, the company achieved a net income of USD$1.7 million, or USD$0.01 per share. For the full year 2013, the company's net income stood at USD$65.1 million, or USD$0.41 per share. The company's rate of return for its balance sheet equity on a trailing twelve months ("TTM") basis currently stands at 7.59%, while its TTM return on assets is a mere 2.12%. Based on the closing price of USD$15.16 per share for the company's stock as of June 6, 2014, the TTM price-to-earnings ratio stood at 45.65. In other words, investors are currently paying a very high premium of USD$45.65 for each USD$1 of the company's annualized earnings.

The company rewards its shareholders with a very small quarterly dividend of USD$0.04 per share. At the current price of USD$15.16 per share, this entails a dividend yield of 1.06%.

Stabilizing Revenues - Management's Key Hurdle

The New York Times enjoys a robust brand name, and a fairly loyal customer base. Its revenues over the past five years have shown surprising stability. As the table below indicates, the company's revenues have swung within a narrow band of USD$1.595 billion for 2012 (a 53-week year) to USD$1.55 billion for 2011 (a 52-week year). During this period, the company's net income on the other hand fluctuated widely, from earnings of USD$135.8 million (USD$0.89 per share) in 2012, to a loss of USD$37.6 million (USD$0.25 per share) in 2011.

The New York Times Company

Revenues and Net Income

(in thousands of U.S. dollars)

Click to enlarge

2013

(52 weeks)

2012

(53 weeks)

2011

(52 weeks)

2010

(52 weeks)

2009

(52 weeks)

Revenues

$1,577,230

$1,595,341

$1,554,574

$1,556,839

$1,581,860

Operating Costs

$1,411,744

$1,441,410

$1,411,652

$1,422,173

$1,521,190

Net Income attributable to common shareholders

$65,105

$135,847

($37,648)

$109,640

$23,006

Diluted net income per common share

$0.41

$0.89

($0.25)

$0.72

$0.16

Click to enlarge

The New York Times faces two primary revenue-related challenges. Despite subscription price increases, in recent periods the company's revenues from print-based circulation have shown a gradual downward trend. Likewise, its overall advertising revenues continue to shrink. The company has struggled to develop its websites and digital media properties to make up for these lost revenues. Revenues have in fact more or less stabilized, but have not witnessed substantial growth. It is unclear what would be the source of any such substantial growth.

Primed for Explosive Growth? Unlikely

The publicly traded shares of the New York Times are currently trading at a TTM price-to-earnings ratio of 45.65. The market generally extends such elevated price-to-earnings ratios to companies whose profitability is expected to significantly grow over time. In the case of the New York Times, any significant earnings growth is unlikely to materialize. Earnings growth is generally tied to revenue growth, and in the case of the New York Times revenues are either stagnant or declining.

The management of the New York Times places heavy emphasis on the company's digital initiatives. In this respect, some successes may be noted. For the first quarter of 2014, online-only subscriptions grew 18% compared to the same quarter a year earlier.

Although this trend is positive, growth of overall circulation and advertising revenues continues to disappoint. Total circulation revenues grew from USD$205.5 million in the first quarter of 2013 to USD$209.7 million in the first quarter of 2014, for a year-over-year growth of only 2.1%. This includes the impact of a print-home delivery price increase. Advertising revenues likewise witnessed a marginal increase, growing from USD$153.3 million to USD$158.7 million during the period, for a year-over-year increase of 3.4%. This modest revenue growth may moreover not be company-specific, but may be due to secular trends affecting the media industry as a whole, such as a better economy.

Indeed, as the table below indicates, the company's overall revenue growth numbers in recent years have been feeble. These are simply not the numbers one would expect from a high growth company.

The New York Times Company

Annual Revenue Growth

(Jan. 1 - Dec. 31)

(expressed as a percentage)

Click to enlarge

2013-2012

2012-2011

2011-2010

2010-2009

Circulation

3.70%

12.70%

10.40%

1.40%

Advertising

(6.30%)

(5.90%)

(5.90%)

(4.00%)

Other

(2.50%)

(5.10%)

2.90%

(0.30%)

Total

(1.10%)

2.60%

1.90%

(1.40%)

Click to enlarge

As can be seen, the erosion of advertising-related revenues poses a key challenge to the company. Advertising-related revenues have historically been a substantial component of the company's overall revenues. In 2013, for example, total advertising revenues were USD$666.7 million, and amounted to 42.3% of total revenues. As can be seen, advertising revenues have steadily eroded (despite the marginal, year-over-year uptick in the first quarter of 2014, noted above).

In 2013, print-based advertising revenues represented 76% of total advertising revenues. Print-based advertising revenues declined 7% in 2013 compared to the year earlier. Digital advertising revenues did not make up for this loss. In fact, digital advertising revenues declined as well, by 4.3% compared to a year earlier.

A Very High Effective Income Tax Rate

The New York Times is a heavily taxed business, and it is not clear what, if any, tax mitigation strategies the company's management has implemented or intends to implement. For the first quarter of 2014, the company reported a whopping effective income tax rate of 56.9%. This rate of taxation is not exceptional for the company. Indeed, for the full year 2013, the company's effective tax rate was 40%. In 2012, the company's effective tax rate was 36.3%.

These taxation levels are not typical of the company's business. As the table below indicates, the company's competitors report effective tax rates that are generally lower than those for the New York Times. When high taxation levels do occur, these typically relate to one-off adjustments or reserves. For illustrative purposes, the effective tax rates of two advertising-driven media companies, Google, Inc. (NASDAQ:GOOG) and Yahoo, Inc. (NASDAQ:YHOO) that operate primarily online are also included.

Illustrative Media Companies

Effective Taxation Rates

Click to enlarge

Company Name and Ticker

2013

2012

The New York Times Company

40.00%

36.30%

Gannett Co., Inc. (NYSE:GCI)

22.60%

31.50%

News Corp (NASDAQ:NWSA)

(216.00%)

14.00%

The McClatchy Company (NYSE:MNI)

41.40%

(99.30%)

The E.W. Scripps Company (NYSE:SSP)

91.60%

29.80%

Google Inc.

15.74%

19.41%

Yahoo! Inc.

24.00%

37.00%

Click to enlarge

The New York Times operates from its headquarters in Manhattan. Both New York City and New York State are high-tax jurisdictions. State and local taxes heavily impact the company's bottom line. For 2013, the company paid out 8.8% of its pre-tax income to state and local authorities, compared to 4.4% in 2012, and 15.8% in 2011. The company's management has not given any indication as to what, if anything, it intends to do to lower the company's overall tax exposure, or whether it views the company's relatively high effective tax rate to be a problem or a drag on shareholder value.

New York City Headquarters - A Flashy Expense, but Does it Create Value?

Since 2007, the New York Times has had its headquarters in a landmark skyscraper in the Times Square area of Manhattan. This 1.54 million gross square feet building was developed by the company and a partner at a cost to the company of approximately USD$610 million. The company was initially allocated a condominium interest over 828,000 gross square feet in the building.

In March 2009, the New York Times entered into a sale-leaseback transaction with respect to the approximately 750,000 rentable square feet currently occupied by the company. The company sold its condominium interest in those 21 floors for USD$225 million, entering into a simultaneous option to repurchase this interest for USD$250 million in 2019. The newspaper retained a condominium interest over seven floors in the building, totaling approximately 216,000 rentable square feet. Six of these floors are currently leased to a third party.

The New York Times has historically derived the bulk of its revenues from the New York City metropolitan area. Historically, the newspaper has ranked first among its print competitors in the New York City metropolitan area in terms of print circulation and advertising revenues. The printed version of the newspaper remains available in the United States and abroad through the use of remote print sites. The newspaper's print circulation has however traditionally centered in the New York City metropolitan area, where it is widely available by home delivery and through newsstands and retail outlets.

Given the company's digital initiative, its revenues going forward should perhaps no longer be so closely tied to the city. Perhaps some activities and operations currently conducted in the city could be outsourced to cheaper locations, away from a "prestige" location in the heart of Manhattan. The company has however not indicated that any such move is being contemplated.

The "Digital Initiative" - a Satisfactory Solution to the Company's Challenges?

The management of the New York Times in its public pronouncements makes great hay about the newspaper's so-called "digital initiative." The company has however not publicly addressed a fundamental problem of its "revamped" business model. In particular, the revamped New York Times is in the business of generating online content, as opposed to creating and implementing innovative ways of distributing such content. The creation of content online is a brutally competitive business, with razor thin margins. The company's management does however recognize this problem in a leaked internal report, which can be found here.

The dilemma of the New York Times is that online viewers' attention span is heavily fractured, and competition for their attention is therefore intense and (accordingly) poorly compensated. In the print age, the newspaper could be faithful to its famous motto and single out for publication "All the News That's Fit to Print." In the digital age, it cannot.

A platform containing "All the News That's Fit to Print" could find it hard to compete profitably with the sheer volume of information readily available online, much of which is provided for free. In a sense, the publishers, editors, and journalists of the New York Times have been "demoted" by technology. Unless the New York Times heavily innovates, it faces the prospect of paying full time salaries to a small army of mere "bloggers" working from the firm's 21 floors at its very expensive Manhattan headquarters - a business model which, over the long run, may not be sustainable.

Class A/Class B Shareholder Structure - A Collar around Public Shareholders

From a prospective investor's standpoint, a problematic aspect of a potential investment in the New York Times is its Class A/Class B share structure. The public shareholders of the New York Times do not control the company. The public shareholders hold the company's Class A shares, while the publisher and his family hold the Class B shares. The Class A shares elect only 30% of the company's board members, only voting proportionately with the Class B shares on equity grants, on material acquisitions, and on auditor selection. As the company openly recognizes in its public filings, the Class A/Class B shareholder structure "could create conflicts of interest," could discourage or effectively bar potential mergers or change of control transactions, and could adversely affect the value of the company's publicly held stock.

Although the public shareholders have a seat at the company's board of directors, and do have a say as to some corporate governance matters, the company remains firmly in the control of its publisher and his family. This may or may not help to preserve the company's "editorial independence," although it certainly does inhibit shareholder value. Without the consent of the publisher and his family, a sale of the business or a change of control cannot be achieved, even if the public shareholders are overwhelmingly in favor. The company's management, even in the case of incompetence, cannot be replaced without the consent of the Class B shareholders.

The Asset Meltdowns of the 1990s and mid 2000s

The New York Times recently resolved some legacy issues with respect to certain acquisitions that were disastrous for the company, and severely impaired the company's balance sheet. In 1993, the company purchased the Boston Globe for USD$1.3 billion. In 1999, it purchased the Worcester Telegram & Gazette for USD$296 million. These two assets (the "New England Media Group") were sold for only USD$70 million in a transaction that was finalized in the fourth quarter of 2013. The sharp drop in valuations was precipitated by the same challenges currently confronting the New York Times: steadily eroding print-based circulation and advertising revenues.

To view these losses in context, as of the first quarter of 2014, the New York Times had shareholders' equity of only USD$848.6 million. The company's entire market capitalization as of June 6, 2014 stood at USD$2.28 billion (for a price-to-book ratio of 2.70).

The New York Times assumed some unfunded pension plan-related obligations in the course of the sale of the New England Media Group assets. These obligations will serve as a drag on the company's ongoing profitability. In 2014, the company's management expects the company's pension-related costs to surge to USD$32 million, or an increase of USD$19 million (an increase in excess of 100%), partly as a result of pension obligations associated with the New England Media Group.

Other serious missteps have occurred. In 2005, the company purchased About.com for USD$400 million, only to unload it in 2012 for USD$300 million. In addition, the New York Times burned approximately USD$600 million in cash purchasing its own stock at prices much higher than today.

Given the tight control that the Class B holders exert over the New York Times, the executives behind these disastrous acquisitions and cash expenditures remain, for the most part, firmly with the company.

Balance Sheet: Smaller, but Stable

Despite a massive, asset-side driven shrinkage of its balance sheet, the New York Times is currently a more or less financially stable company. As of the first quarter of 2014, the company reported current assets of USD$1.033 billion, including cash, cash equivalents and short- and long-term marketable securities of approximately $973 million. Current liabilities stood at USD$552.2 million, for a relatively robust current ratio of 3.36 as of March 31, 2014. Total debt and capital lease obligations (largely related to the sale-leaseback of the company's Manhattan headquarters) stood at approximately USD$685 million. Accordingly, the company's current pile of liquid or semi-liquid assets exceeded its obligations by USD$288 million.

Conclusion

The New York Times will probably survive in some shape or another the print-to-digital transition. That being said, at current prices, an investment in the New York Times does not make much sense.

The stock of the New York Times is priced as if the company were a high-growth company, which it is not. Its revenues show a flat to downward trend. In particular, the company's print-based advertising revenues reflect a steady decline. The company's profitability is somewhat erratic. The company's cost structure, in terms of effective tax rate, underfunded pension plan and other pension-and personnel-related costs, and real estate-related obligations, is high.

The company's management has made some serious mistakes in the past. Because of the company's Class A/Class B structure, the company's public shareholders have little influence on the day-to-day management of the company. Instead, the company's executives are selected and retained by the Class B shareholders.

On June 6, 2014, the public shares of the company closed at a price of USD$15.16 per share, for a TTM price-to-earnings ratio of 45.65. The dividend yield stood at a feeble 1.06%. The meager rewards that an investment in the company offers the company's public shareholders do not justify such a high price.

I would only consider an investment in the New York Times at prices below USD$3.30 per share, which would bring the TTM price-to-earnings ratio to a more reasonable level of 10, and the yield to a more generous 4.8%. That recommended entry price is 78% below the current market price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.