You will be surprised to hear that I am somewhat addicted to keeping track of the value of the home we have in the Seattle area and the one in Scottsdale, Arizona. It seems that Zillow (Z) uses comparisons to recent sales as the primary vehicle to come up with their "Zestimates". We believe at Smead Capital Management (SCM) that comps are a useful tool in valuing common stocks. They are even more useful if the transactions are recent and spectacularly useful if the comps come from a savvy buyer. We would like to run our version of a Zillow estimate on Gannett (GCI).
What triggered these analyses were the recent sale of 9 TV stations by McGraw-Hill (MHP to E.W. Scripps and the acquisition of 63 daily newspapers by Warren Buffett's Berkshire Hathaway (BRK.B) from Media General (MEG). Gannett owns 84 daily newspapers including USA Today and the Arizona Republic. They own 23 TV stations which are mostly affiliated with NBC, ABC and CBS. Lastly, they have a major online/digital business led by CareerBuilder. To get comps on CareerBuilder we used public market prices and PE ratios on companies which compete with Gannett. Infospace (INSP), Monster (MWW), Move.com (MOVE) and IAC Interactive (IACI) provide us a blended valuation to complete the three parts of the company. Below is our analysis:
To say that Warren Buffett is a shrewd buyer is an understatement. E.W. Scripps is a veteran owner of TV stations and is certainly aware of how out of favor the industry is in the age of the internet competing for people's time and eyeballs. Therefore, we don't consider this a maximization of value for Gannett in the same way that selling our house today would put us anywhere near the peak value which could be attained over the next ten years. It is a compelling view into how undervalued Gannett is as it trades near $13 per share recently.
Why is Buffett buying newspapers today when he has explained how damaging the internet has been to the stranglehold newspapers had on the delivery of important and entertaining information? We think the answer is three-fold; content differential, profitability and price. Buffett believes that the information in communities which is not handled effectively by anyone else is being established once again. At the Berkshire Hathaway annual meeting he talked about the fact that ESPN (part of Disney (DIS)) is where you go to get national sports news and stock quotes are available like water on the internet. However, he added that local sports, local politics, community affairs and obituaries are still important and valued. A successful newspaper must have content which is different and timelier than can be gathered anyplace else. Here's what the Oracle of Omaha said in a letter dated May 23, 2012 to the publishers of Berkshire Hathaway's daily newspapers:
Though the economics of the business have drastically changed since our purchase of The Buffalo News, I believe newspapers that intensively cover their communities will have a good future. It's your job to make your paper indispensable to anyone who cares about what is going on in your city or town.
That will mean both maintaining your news hole - a newspaper that reduces its coverage of the news important to its community is certain to reduce its readership as well - and thoroughly covering all aspects of area life, particularly local sports. No one has ever stopped reading when half-way through a story that was about them or their neighbors.
Second, Buffett argues that by ceasing to give away content and moving away from newsprint to digital delivery will give substantially better profit margins to surviving newspapers. Gannett told us in a conference call recently that they are putting up pay walls on all their online newspapers sites. Buffett says it this way:
We must rethink the industry's initial response to the Internet. The original instinct of newspapers then was to offer free in digital form what they were charging for in print. This is an unsustainable model and certain of our papers are already making progress in moving to something that makes more sense. We want your best thinking as we work out the blend of digital and print that will attract both the audience and the revenue we need.
Lastly, Buffett and E.W. Scripps are getting very favorable prices because there is a lack of optimism about businesses which compete with the internet, be it news content or TV entertainment. By being greedy when others are fearful, they are getting the price from a "buyers" market. Mr. Buffett describes Mr. Market this way:
Times are certainly far tougher today than they used to be for newspapers. Circulation nationally will continue to slip and in some cases plunge. But American papers have only failed when one or more of the following factors was present: (1) The town or city had two or more competing dailies; (2) the paper lost its position as the primary source of information important to its readers or (3) the town or city did not have a pervasive self-identity. We don't face those problems.
We at SCM believe that the improvement in the economy the next three to five years bodes very well for the deliverers of content. The sale of houses and cars are a big advertising market for newspapers and local TV stations. Housing has been in the worst depression since the 1930's and auto sales have been muted by the anemic recovery we have had so far. In summary, we like our chances with Gannett, when the comps show it worth $24.44 per share in our analysis. Remember, Buffett and E.W. Scripps bought at prices chosen to make good returns on their recent purchases.
Disclaimer: The information contained in this missive represents SCM's opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Some of the securities identified and described in this missive are a sample of issuers being currently recommended for suitable clients as of the date of this missive and do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.