Monday, January 03, 2011

Wall St. spanked debt-laden publishers in 2010

Wall Street repudiated the shares of debt-heavy newspaper companies in 2010 at the same time the stocks of generally less leveraged publishers advanced.

In a decidedly mixed year for the 11 remaining publicly traded newspaper companies, share prices last year soared as high as 51% for A.H. Belo while they plunged by an almost identical amount – 50.5% – at GateHouse Media.

As illustrated in the table below, the shares of six publishers rose in 2010 at the same time their peers went south. If you average out the winners and losers, the shares of the industry rose about 1% during the 12 months that the Standard and Poor’s index of 500 stocks gained 12.8%.

But the average performance for the industry is meaningless in light of the wide-ranging performance of the individual stocks.

The principal reason for the sharply disparate performance among publishers is the amount of debt loaded on their companies. Belo has zero long-term debt on its books, while GateHouse is staggering under $1.2 billion in debt, an amount equivalent to nearly 13 times its EBITDA in the last 12 months.

EBITDA – which stands for earnings before interest, taxes, depreciation and amortization – is a common way of measuring the profitability of companies. Financiers divide a company’s debt by its EBITDA to gauge its ability to repay the money it borrows.

Given the uncertain future for newspapers after 4½ straight years of declines that brought total industry advertising sales in 2010 to approximately half of the record $49 billion achieved in 2005, some authorities believe newspapers should borrow no more than one time their EBITDA.

While this goal was beyond the reach of the publishers who borrowed aggressively to expand their empires prior to the financial meltdown, the newspaper companies with the lowest debt generally fared the best on Wall Street in 2010.

As noted in the table below, modestly indebted companies like Scripps (almost no debt), the Washington Post Co. (debt equal to 0.5 times of its EBITDA), Journal Communications (debt of 1.5x its EBITDA) and Gannett (2.0x debt) enjoyed neutral or favorable treatment on Wall Street in the last 12 months. On the other hand, the shares of GateHouse (12.9x debt), Lee Enterprises (6.4x debt) and Media General (5.8x) were sold off. (CORRECTION: Owing to a data transcription error on my part, the ratio of Lee was overstated in the original post; the number publisher here now is correct.)

There are some exceptions to the trend:

:: Shares of the New York Times Co. dropped 20.7% even though it trimmed its debt to 1.8x times EBITDA from a ratio of 3x a year ago. One drag on the shares of the Gray Lady may be the two-tiered ownership structure that gives family members superior voting authority over public investors.

:: McClatchy’s stock rose 31.9% even though its debt is 4.4x its trailing operating earnings. Here is the likely reason for the bounce: While the company looked at the end of 2009 like it might not be able to avoid joining several other over-leveraged publishers in bankruptcy court, MNI appears to have dodged the bullet by slashing expenses, boosting profits and reorganizing its debt.

:: News Corp.’s shares advanced by 3.3% despite an 8.8x debt load. The likely reason for this is that the company’s worldwide broadcast, cable, satellite, movie and other non-newspaper franchises are performing sufficiently well that investors are willing to tolerate a higher debt load.

What's behind the seemingly schizophrenic approach to investing newspapers?

The divergent performance of newspaper stocks in 2010 suggests that at least some investors are willing to put their money on companies with low debt burdens in the belief that the publishers will have the ingenuity, revenue and cash flow to morph their companies into successful players in the digital age.

Heavily indebted publishers, on the other hand, are forced to limit investment in their companies, because they have to earmark a disproportionate amount of their profits to interest payments. To maximize profits to pay their hefty interest bills, many publishers have cut staff, squeezed newshole, curtailed circulation and taken other, similarly counter-intuitve actions to come up with the money necessary to stay one step ahead of their creditors.

The selloff in highly leveraged newspaper companies means that Wall Street is rejecting publishers who are not able to invest in the long-term growth of their businesses.

At the simplest level, investors want to put their money into companies that have the best chances of growing in the future. But many investors probably also fear that the over-extended publishers eventually could go into bankruptcy to offload their crushing debt, a step that would render their investments worthless.

Choosing to be safe than sorry, investors last year steered clear of over-levergaed newspaper companies.


Anonymous Anonymous said...

Just remember that the Washington Post makes its real money from running private colleges, not publishing.

And the colleges themselves have been in the news recently, with potential adverse impacts on future earnings.

See here.

8:18 PM  

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