Tuesday, July 06, 2010

News stocks lag despite dramatic rebound

Although the shares of the publicly traded newspaper companies have advanced impressively from their all-time lows 12 months ago, they still are worth on average about a fifth of their value on June 30, 2005.

The good news for the battered publishing sector is that publicly held newspaper shares rose by an average of 332% in the 12 months ended on June 30 – handily surpassing the 12% gain in the same period of the Standard & Poor’s average of 500 stocks.

But the bad news for investors who loyally clung to their shares for the last five years is that their holdings at the close of trading on June 30 were worth an average of 81% less than they were on the same date in 2005. By contrast, the S&P 500 was down 13% in the same interval. (Details are below; click image to enlarge it.)

The sharp run-up in newspaper shares in the last 12 months can be attributed to the following:

:: By drastically cutting staff, newsprint consumption and other expenses, newspapers were able to improve their profitability in spite of a 28.6% plunge in advertising sales in 2009.

:: Though several of the publicly held companies were heavily burdened with debt assumed in the days when the potential for future growth seemed unlimited, they all managed to stay out of bankruptcy court at the same time nine of their privately owned peers sought refuge in Chapter 11.

:: The immediate future for the business does not appear to be as gloomy as it seemed last year, when such iconic papers as the Rocky Mountain News and Seattle Post-Intelligencer shut their doors. This in part may be because newspapers stopped writing stories about how bad their business was.

Taken together, the above factors evidently persuaded bargain-hunting investors to accumulate newspaper shares at a fraction of their historic value in the hopes of profiting as they bounced back.

Thus, it could be argued that the run-up in newspaper shares represents more of a trading phenomenon than an expansive vote of confidence in the future of the industry.

This thesis is supported by the fact that newspaper shares, despite the impressive rebound in the last 12 months, remain well short of the record peaks they hit as recently as five years ago.

One reason for the continued depressed state of the shares undoubtedly has to be uncertainty about whether the global economy will pull itself out of the worst recession since the 1930s.

But another may be that investors remain to be convinced that newspaper publishers know how to replicate the predictable revenue growth and enviable profitability they enjoyed in the days prior to the explosion of the digital media.


For the purposes of this analysis, I looked at the shares of six companies that have continued to derive the preponderance of their revenues from newspapers since 2005. The companies are Gannett, Journal Communications, Lee Enterprises, Media General, McClatchy and the New York Times Co.

I left out GateHouse Media because it did not go public until 2006 and I eliminated A.H. Belo and E.W. Scripps because they each spun off their non-newspaper assets in 2008. News Corp. and Washington Post Co. were omitted because they do not derive the bulk of their sales from newspapers.


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