Newspaper Stocks Refute the Skeptics

At a weekend get together, I heard from many family members and friends about what they consider to be must-reads to stay up to speed on a daily basis. All seemed to agree that weekly news magazines such as Time and Newsweek seemed to be losing their relevance, moving too slowly in a world that has ever-shortening news cycles. Others noted that the Internet keeps them informed, but acknowledged that there is still a large credibility gap between journalism and blogging. And a few others noted that their local papers in cities such as Minneapolis or Miami were losing their ability to broadly cover important events as they continue to gut their newsrooms.

And all seemed to agree that News Corp.’s (Nasdaq: NWS) The Wall Street Journal, New York Times Company’s (NYSE: NYT) The New York Times, and Gannett’s (NYSE: GCI)  USA Today  still managed to maintain devotees with their respective foci on business news (WSJ), international and domestic politics and policy (NYT), and consumer-friendly sports, entertainment and “light news” (USA).

Yet many investors have concluded that these publishing powerhouses are facing a mortal decline, and are still dubious of these stocks, even as they bounced up from their lows. For example, The New York Times Company saw its sales shrink -3% in 2007, -8% in 2008, and -17% in 2009. Gannett has been caught in a similar revenue spiral. But with the economy having bottomed, revenues are expected to stabilize this year and next. And with costs sharply lower from a few years ago, profits are rebounding.

Indeed, share prices are well up form their nadir. The New York Times was up +6% on Monday, capping a +25% move in the last two weeks.

The key question for investors: is this a business poised for an upturn as ad spending rises, or just a false dawn as these companies prove unable to monetize their brands in a world where “news wants to be free.”

Newspaper readership is indeed in a steady decline, but these firms can still thrive by getting a bigger slice of a smaller pie. A number of newspaper chains are in bankruptcy, or have been so gutted that they are no longer able to adequately cover their regions, let alone national and international news.

And that’s where The New York Times and USA Today come into play. Each of those newspapers may start seeing circulation gains in some of the markets where the local papers have lost any tangible readership interest. (Call a friend in south Florida and ask them about their local papers to get a sense of what I mean). Any major retrenchment by a local publisher is an opportunity for expansion for these national papers. These publishers can offer these locals a ready-made co-branded national or international section that represents a cheaper path to non-regional coverage while providing them with 100% margin licensing revenue.

Or they can pounce while rivals retrench by boosting circulation in other cities outside the New York area. These companies already have a high degree of fixed costs servicing other regions, so incremental revenue gains would help boost variable profits. The increased national circulation would also sit well with national advertisers, many of which are increasingly shunning radio and broadcast television.

For Gannett, the prescription is simple: Stay the course. Management has been taking a series of steps that should eventually find appeal with investors such as a steady pay down in debt. Long-term debt/equity has fallen from 71.8% to below 40%. Cost cuts are also helping. Revenue fell -4% in the most recent quarter, but expenses were down -9%. And don’t write off the broadcast assets. Gannett owns and operates 23 TV stations, 12 of which are NBC affiliates, and all of which still contribute a considerable amount of cash flow.

In a similar vein, The New York Times is expected to more than double profits this year, even as sales fall another -1% to -2%. If ad rates finally turn up, then strong profit gains would continue.

Yet even as ad rates firm and competition withers, these two publishers still face a very real problem: their websites. The New York Times’ website is so good that it is cannibalizing circulation sales, especially since it is 100% cheaper than the print version.

It has become conventional wisdom that online versions of newspapers must be free. But as The Wall Street Journal has proven, you can have it both ways. Online readers for the WSJ get a discounted rate from the print version, largely to reflect the savings associated with printing and distribution Of course, the Times already tried to charge for content once, putting its editorial page writers behind a wall. That half-hearted attempt was a mistake, and led readers to consume the remaining 85% of daily content that was still open to the public. By next year, the Times plans to put the wall back up, charging more for content.

In a world where The New York Times remains a must read for New Yorkers, and an increasingly important source of news for many who live outside the New York area as well, the paper will find that it remains indispensable. For that matter, according to, 35% of all online readers come from outside the United States, where physical delivery isn’t even an option.

As is the case with the WSJ, pricing needs to be well below that of the print version, to reflect the smaller costs associated with the website. If I am typical of many online readers, I would hate the idea of paying for my daily New York Times fix, but I would ultimately do so anyway.

Do the math. The New York Times has roughly 12 million to 15 million unique visitors to its site in any given month. Let’s assume that the paper allows partial free access to 15-20 top stories per day, enabling it to maintain decent traffic levels from casual surfers, and thus enabling traffic and ad revenues to remain at reasonable levels. Then let’s assume that only 500,000 readers are willing to pay $100 per year for full online access (which is the same price of the online WSJ).  That works out to be $50 million in incremental revenues. As noted, online ad revenue would take a partial hit as fewer pages would be served to readers that are unwilling pony up for a subscription fee.

Action to Take –> Investors remain uncertain as to whether these large publishers can really survive. The real question should be “to what extent can they thrive?” Competition is on the ropes, any economic recovery would boost ad rates, and their websites will still figure out a way to bring in solid revenue gains. Gannett looks especially appealing, selling for around eight times profits.