Donald Rumsfeld may not be the only one upset with the New York Times. With less than a fifth of its value left compared to a decade ago, investors are not confident about the direction of the famous newspaper. Wall Street analysts have also been hesitant, rating it around a "hold". Consensus estimates are that EPS will decline by 22% in 2011 to $0.64, increase by 14.1% the following year, and then decrease by 2.7% the next. Why the negativity?
While I think that the New York Times (NYSE:NYT) as it currently stands, is no worse than a "hold", I believe that from an turnaround point of view, management can and will take the necessary steps to unlock shareholder value. Firstly, the newspaper's operating margins are much too low, especially on a peer basis. Respective EBIT margins (2010 numbers) for the New York Times, News Corp (NASDAQ:NWS), and Gannett Co. (NYSE:GCI) are 9.8%, 13.6%, and 18.3%. Moreover, approximately 40% of the New York Times' full-time employees are unionized. If the company shifts its reliance from print to online media, I estimate that it reasonably could reduce operating costs by at least 25%. This will be, in my opinion, inevitably where the company goes in the future. And when it does, I see the company far exceeding the negative expectations of the current market.
The New York Times has already taken a few key steps to boost net income. In 2009, it reduced its cost base by $475M and then by $171M the next year. While this is a good start, with 84% of sales coming from newspapers, changing the overall direction of the company could increase operating margins much more.
Additionally, the media conglomerate has many holdings that are either struggling or offering little synergistic value. The New England Media Group has been facing some difficulty and represents 18.8% of sales. Other New York Times holdings include the International Herald Tribune, The Boston Globe, Boston.com, About.com, The Worcester Telegram & Gazette, health websites, and 16.6% ownership of New England Sports Ventures, among others. The company could explore spinning off some of these units as it reinvents its online presence. Below is a chart from the 2010 annual statement.
While roughly 51.9% of revenue comes from advertising, 41.3% come from circulation. Operating in a very competitive market with few barriers to entry, the New York Times' newspaper business is being viewed as unsustainable by analysts. Much of the sustainable revenue the media company generates comes from online, chiefly in the form of advertising. Without a strong online presence, the stock will suffer.
It is my belief that the market has not properly valued the New York Times' online business. According to Alexa's research, NYTimes.com has a traffic rank of 28 while wsj.com has a traffic rank of 66. In December 2010, the website had 32.4M uniques in the United States and 44.8M worldwide. As the company starts to reduce costs and transition more to an online format, I expect NYT to far exceed EPS consensus forecasts.
Although only 6% of shareholders in NYT are core value, I believe that the company is undervalued based on its potential. While it is understandable to fear the sustainability of the news industry, the New York Times is one that I expect to flourish in the years ahead with its brand name. This will only occur, however, if management shifts more to online media and increasing volume.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.