Newspapers are emblematic of the power of free press in the United States. But the industry has encountered a perfect storm of sorts in recent years. First, free web news contentis widely available. Second, a sluggish economy has walloped advertising revenues. And third, newsprint and paper prices have increased substantially in recent years. The traditional newspaper business, and securing advertising revenue from those sales, is subject to a recovering economy. Positive bumps likely will occur in 2012 due to the Summer Olympics and even more importantly, a major political year. But over the longer term, I have no idea when or if employment will return from historically low levels and income growth will return. Of course, each individual company has its own challenges and potential opportunities. I will look at the leading newspaper publishers in the United States, looking at their current balance sheets, as well as how well positioned they are for futures in their traditional business and for digital growth.
Washington Post Company (WPO)
WPO is not just a newspaper company. In addition to the flagship Washington Post and a smaller west coast newspaper, it owns a handful of network television stations, cable platforms and educational companies. WPO's stock was recently trading at about $336 per share, which is toward the low end of its 52 week range of $455.68 to $308.50. Its current market capitalization is $2.6 billion and its current P/E is just over 20. It pays a current annual dividend of $9.40, for a yield of 2.70%.
It was a difficult third quarter of 2011 for WPO. It recorded a loss under GAAP rules of $6.2 million, or $0.82 per share. That is compared with the third quarter of 2010 when the company recorded profits of $62 million. However, if we take the many one time items and discontinued items off the calculation, WPO earned $39.2 million in the third quarter of 2011.
WPO's balance sheet is actually in good shape compared to its peers. Its stock is currently within 1% of its book value. It has just a little over $400 million in debt and over $600 million in cash. That balance sheet strength will allow it to make whatever acquisitions management deems fit. WPO also is well-regarded by experts. Warren Buffet, for one, owns 21.79% of WPO. Analysts in general generally like the company, with a mean recommendation of 2.0. I like WPO a lot. But I urge holding off for now on purchasing WPO to see whether the third quarter was a blip or a trend.
New York Times (NYT)
NYT owns the New York Times, Boston Globe, various web sites, and about a dozen local network television stations. NYT closed recently at about $6.50 per share, near the low end of its 52 week range of from $11.72 to $5.50. Its market capitalization is just under $1 billion, and it has lost money over the past year, so it has no P/E. Neither has it paid a dividend since 2008.
NYT reported earnings for the third quarter of 2011 of $15.7 million, or $0.10 per diluted share. In the year earlier period, NYT lost $4.3 million. Much of NYT's improvement, and management's optimism toward the future, lies in its revenue producing, digital service. NYT also reported advertising and circulation trends had turned positive in early October.
During the third quarter, NYT prepaid by three years a high yielding debt issue. Its indebtedness is roughly $800 million, and its current cash position is about $450 million. T.Rowe Price Group, Inc (TROW) owns over 7% of NYT, and the mean analyst rating is a neutral 3.0. At its current depressed stock level, NYT holds appeal to speculative investors. It will no doubt take time for NYT to return to the profit levels of years ago, so patience will also be required.
Gannett Company, Inc. (GCI)
GCI is the nation's largest newspaper publisher, with over 80 daily newspapers in the U.S., the largest of which is USA Today. It also has another dozen dailies in Great Britain. It owns hundreds of websites, and 23 network television stations that reach nearly 20% of the U.S public.
GCI was recently trading at a little over $10 per share, toward the lower end of its 52 week range of from $18.93 to $8.28. Its market capitalization is about $2.5 billion, and it P/E is 4,9. It recently doubled its quarterly dividend rate to $0.10, for an effective annual yield of 3.0%.
In the recently concluded third quarter to 2011, GCI reported a profit of very nearly $100 million, or $0.41 per fully diluted share. This was off about 2% from the year ago quarter. Profits and revenues declined in GCI's newspaper and broadcast divisions, but revenues from GCI's digital business continued positive momentum, increasing by 10%.
GCI currently has about ten times as much debt as cash on hand. It is not that its debt is that unduly large for a company its size (revenues average over $5 billion per year). But it is distressing that GCI only has $196 million cash on hand. Certainly, it has the free cash flow, almost $200 million in the third quarter alone, to improve its debt leverage.
GCI has historically paid roughly 30% of its after tax profits out as dividends. At the current rate, and expected 2011 earnings totals, the ratio is 12%. Further dividend increases are likely. Respected institutions such as JPMorgan Chase & Company (JPM) and Alliance Bernstein Holdings (AB) combined own 16% of the shares, and the analysts at large are mildly positive, with a mean rating of 2.4. I too am neutral. Gannett has been the most consistently profitable newspaper publisher. If it can maintain double digit growth in its digital business, it may be a fine growth and income play. Further investigation is warranted.
McClatchy Company (MNI)
MNI is the nation's third largest newspaper publisher, owning properties such as the Miami Herald and Sacramento Bee. MNI was trading recently at about $1.10 per share, near the low end of its 52 week range of from $5.61 to $1.05.. Its market capitalization is $94 million, and a P/E of 3.5. It has not paid a dividend since 2009.
The MNI story is all about debt. In 2006, in purchased the larger, Knight Ridder newspaper group. That purchase required MNI to undertake over $3 billion in debt, The service of that debt has left pension obligations unfilled by over $600 million, and cash on hand at virtually nil. As of the end of the third quarter of 2011, MNI still only carried $17 million cash on the books.
The saving grace? MNI is trading now for less than half its book value. That has brought adventurous value investors, such as John Paulson, on board. He purchased 5.9 million shares of MNI at an average cost of about $5 per share mostly in 2010. He currently owns over 9% of MNI.
MNI is a terrific speculative play at today's price point. There is substantial risk due to a poor balance sheet, but the company has not ever reported an annual loss, and if it can continue paying down its debt, significant price appreciation is possible.
E.W. Scripps Company (SSP)
SSP is another media conglomerate. It owns 13 daily newspapers, and another dozen network television stations. SSP was recently trading at a little under $8 per share. Its 52 week range is from $10.56 to $6.36, and its market capitalization is about $430 million. It has a P/E of 373, and has not paid a dividend since 2008.
SSP is suffering from the same ills as other media companies listed here. In its third quarter of 2011, SSP reported a loss of $10.7 million, or $0.19 per share. Newspaper revenues were off year to year 4% due to advertising declines, and television revenues were off 14%..Management is aware that long term growth will be from digital sources, and SSP has invested in that area.
SSP carries zero debt and zero pension obligation on its balance sheet. Much of the company's stock is controlled by family insiders. It has an agreement, subject to regulatory approval to purchase a block of television stations from McGraw Hill Company, Inc. (MHP).
In addition to family control, relatively large blocks of SSP stock are owned by the likes of BlackRock, Inc. (BLK), and other well regarded institutional concerns. SSP is mildly favored by analysts, with a mean recommendation of 2.3. I too am somewhat positive about this issue, but caution that with its lack of dividend and high Beta of 2.98, it is best suited for speculative investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.