Thursday, January 03, 2013

Why investors embraced newspapers in 2012

Part two of two parts.  The first part is here

While more than half of newspaper advertising has vaporized since peaking at $49.4 billion in 2o05, the share prices of five out of the nine publicly held publishers impressively outpaced the broader stock market in 2012. 

Yesterday, we looked at the winners and losers among the publishing sector in a year when the average share price of newspaper issues rose 20.8% at the same time the Standard and Poor’s index of 500 shares gained 13.4%.  The industry’s performance on Wall Street last year contrasts sharply with the loss, on average, of a third of the value of publishing shares in 2011.  

Today, we’ll look into the reasons for the remarkable turnaround – and why newspaper shares fared so well on Wall Street in spite the relentless decline over more than half a decade of the industry’s primary revenue stream.  

Before proceeding, it should be noted that even the best-performing newspaper stocks last year closed at a fraction of the prices they commanded six or eight years earlier. For example: Although Lee Enterprises rocketed 61.7% to become the biggest gainer in 2012, its shares closed the year at $1.14, or 98% less than the $49 they fetched in mid-2004. 

In a nutshell, the newspaper stock boomlet of 2012 was fueled by the belief among a certain number of investors that publishers have the motive, means and opportunity to transition their businesses out of the faltering print model and into prosperity in the digital era. 

The investors evidently were persuaded by the persistent and consistent effort of publishers throughout 2012 to change the perception of their industry. As discussed below, publishers at almost every turn emphasized their commitment to introducing a growing array of digital products on the web, on mobile platforms and through the social media.  Further, the executives of most publicly held publishing companies jazzed up their financials by lowering their debt and/or improving their profitability. 

In other words, publishers were telling investors exactly the sorts of things they love to hear.  As long as publishers can deliver – and there is scant reason to doubt they will make every effort to do so – then newspaper stocks may continue to enjoy high regard on Wall Street.  If publishers prove to be longer on rhetoric than they are on execution, their shares – and perhaps individual executives – will suffer. 

Here’s a look at the several factors that fueled fresh confidence in newspapers in 2012: 

Warren Buffett's buying blitz 

America’s favorite billionaire, who already held a stake in the Washington Post and owned the Buffalo (NY) News, got into newspapering in an even bigger way in late 2011 when he  paid $200 million  for his hometown paper, the Omaha World Herald – and then kept buying papers throughout 2012. Saying he believed newspapers to be strong and unique franchises in each of the communities they serve, Buffett quickly acquired most of the Media General papers and, by all accounts, remains in an acquisitive mood.  Buffett’s prominence as an investment guru, combined with his demonstrated conviction, played no small part in fanning investor interest in newspapers. 

Print-to-pixel pivot potential

The publishers whose shares advanced the most in 2012 were also the best at articulating their plans to transform their companies from their print legacies to multiproduct, multiplatform, multimedia digital franchises.  In a presentation to investment analysts in New York last month, the top officers of Gannett used the word “digital” 63 times and the word “print” just 10, according to the transcript of the event.   The story is the same elsewhere.  “It's noteworthy that a growing percentage of our advertising revenues are now coming from sources outside of our traditional newspapers,” said McClatchy chief executive Pat Talmantes in his third-quarter earnings report. “Digital advertising and direct marketing together now make up over 36% of our advertising revenues.” 

Premium payment prospects

After years of charging modest prices for print papers and almost always giving away their digital content for free, many publishers have moved aggressively to force readers to contribute a fatter slice of the revenue pie.  To a large degree, the New York Times paved the way to charging for digital content when it added a pay system to its website in early 2011.  By the end of 2011, the Times generated 42% of its revenue from print and digital subscriber fees, as compared with 27% of its revenues from print-only circulation in 2006.  One of the reasons the subscriber-fee percentage rose is that advertising sales fell; thus, the company saw its revenues plunge to $2.3 billion in 2011 from $3.2 billion in 2006.  Apart from that detail, the seeming success of the Times in getting subscribers to pay for content has motivated literally hundreds of publishers – at least a quarter of the nation’s nearly 1,400 dailies – to either install or get ready to install tollgates on their digital products.  

Pumped-up profitability 

At the same time publishers are working to boost revenues, the ones getting some of the strongest interest from investors in 2012 were those doing the best to cut expenses to generate higher profits in the face of listless advertising sales. In the first nine months of the year, McClatchy’s net income rose 140% even though its sales fell by nearly 5%.  In its investor presentation last month, Gannett, said it hopes to increase operating margins by 15% to 19% between 2011 and 2015, even though sales are projected to rise by only 2% to 4% in the same period. The mid-year decision by Advance Publications to cut print publication of the New Orleans Times-Picayune and other titles to three days a week may have been taken as a sign by investors that virtually every tactic is on the table when it comes to powering newspaper profitability.    

Burnished balanced sheets

While several publishers entered the Great Recession carrying the heavy and costly debt they acquired to finance what proved to be ill-timed acquisitions, they have been paying down and/or restructuring their obligations to repair their dangerously over-leveraged balance sheets. Among them are the New York Times, McClatchy and Lee, the latter of whom even went though a brief, prepackaged bankruptcy to get the job done.

Power of a positive press 

The resurgence in newspaper stocks attracted a number of positive articles last year, which not only proved the enduring power of the press but also seemingly inspired investor interest. “Warren Buffett Likes Newspaper Stocks,” said Forbes in June.  “Newspaper Paywalls Proving Successful,” said the Wall Street Journal in October. And even Jim Cramer, the CNBC wild man who in 2008 called newspapers “one of the worst neighborhoods in the stock universe, last month recommended purchasing Gannett shares, gushing: “The company is executing a phenomenal turnaround plan!” 

Though Cramer may be among the most mercurial market commentators of our age, his mood swings are not uncharacteristic of the market itself.  Cramer, like the market, can be high on a stock one day and down the next.  And when Cramer, like the market, is displeased – as demonstrated in this classic video – the vengeance can be fierce.   


Blogger chuckl said...

Newspapers can surely pivot from print to pixels. Their dilemma is that their advertisers are not pivoting with them.

5:29 PM  
Blogger frank h shepherd said...

... with smoke and mirrors the industry is falling down the rabbit hole... and when they emerge they will not look like anything you can imagine...they will end up a digital commodity with low sales and low margins...all BUT local news is a commodity and with regional, state, national and international news and information(movies, obits, etc)available at numerous web sites FREE...How can thousands of dailies and weeklies and monthly's continue to "sell" their wares to advertisers and "subscribers"???? Ain't gonna happen...

3:58 AM  

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