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This just in: Value investors value newspapers
Despite obituaries detailing their demise, newspaper companies still hold intrigue for some contrarians. Here's why they haven't written off old media yet.
By Jon D. Markman
Derided as irrelevant antiques in recent years, newspapers have made an ironic comeback. Senior Bush Administration officials didn't call bloggers, after all, to complain that war critic Joseph Wilson had a wife at the CIA. Instead, the officials attempted to co-opt the New York Times, Chicago Tribune and Washington Post, along with Time and NBC.
An odd compliment, certainly. But even that attention is refreshing, as newspapers have grown more accustomed to neglect, most notably from Wall Street. Shares of major national newspaper chains, such as The Washington Post (WPO, news, msgs) and Gannett (GCI, news, msgs), are down 10% to 30% in 2005. All have lagged the broad market, as circulation and ad revenues are in freefall. On Tuesday, the largest institutional holder of Knight-Ridder (KRI, news, msgs) made the ultimate cry for help, telling executives via a public filing that they had failed so miserably to unlock the company's value that they should sell it immediately.
How have we come to this crisis of investor confidence, and what are the prospects for this integral piece of our democracy? Consider the following perspective.
Shrinking readership, revenues
Its a random Saturday morning, and after an evening of watching a baseball game on television, reading about it online and talking about it with friends over instant messenger, I pad out to the to the rain-soaked steps in front of my house in my socks and eagerly grab the newspaper. I tear the wet plastic sheeting off the rolled up paper, snap off the rubber band, and plop down in front of a fire with a cup of coffee to read.
Even though its only the Seattle Times, not quite one of the worlds top 10 newspapers, this uncomfortable sock-soaking adventure is counted as a great pleasure. I've spent a decade writing and editing online, but scanning the newspaper -- skipping my eyes over headlines without having to do any clicking, imagine that -- is still something I value and enjoy. In fact, if news were only available online, the home delivery of a full-blown, hard-copy version of the product might be seen as a fantastic innovation. And at 35 cents a copy, subsidized massively by advertising, it's a real bargain, too.
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Quite obviously, I am part of a shrinking minority. In 1991, the Los Angeles Times, where I was then an editor, gave employees coffee mugs celebrating the milestone of hitting 1 million in daily circulation and becoming the nations largest metro daily. Today, the circulation is 5% lower and dropping. And as circulation has plunged, so have mass-market classified and help-wanted advertising revenues.
Consider newspapers victim 1A of the Google Economy. Before there were search engines with targeted advertising, there were full-page newspaper spreads advertising the latest white sale at Sears. When consumers wish to buy a house or motorcycle, rent an apartment or find a job today, they are much more likely to visit HomeStore (HOMS, news, msgs), eBay (EBAY, news, msgs), Craigslist or Monster Worldwide (MNST, news, msgs) than slip 50 cents into a newspaper rack. Online search pinches the pricing of everything newspapers once viewed as their lifeblood.
Younger people have no nostalgic or personal connection with newspapers, and according to industry research are not inclined to ever pick them up. Even as newspaper companies have branched out into owning magazines, broadcast television and cable, they have never found a marketing angle to bring youths into the fold for their principal business units.
Buggy whips, or railroads
Its as if Coca-Cola (KO, news, msgs) had never found a way to sell soda to the children of its original buyers. Major media conglomerates outside of newspapers, such as Viacom (VIA, news, msgs), discovered a path to the future via cable-television programming such as MTV and Nickelodeon. But newspapers are stuck with the massive, costly infrastructure to make and deliver a product that has virtually no relevance to the audience that its sponsors -- retail, entertainment and automobile advertisers -- most covet: 18- to 35-year-olds.
And frankly, there is no compelling reason for that audience to change its current behavior, as the alternatives are, in most cases, less expensive, more flexible and far more useful.
Rather than purchasing newspapers, this key segment of the consumer economy, according to researchers, is reading news and blogs online, and watching television. Their approach to news and commentary has progressively narrowed in a way that is similar to European tastes. They are viewing reports from conservative or liberal providers with whom they are already inclined to agree, and ignoring alternative views.
That doesnt mean that newspapers are dying just yet. Yet their revenue growth is virtually nil, and profit growth -- which is what investors tend to pay up for -- is being achieved primarily via cost-cutting and accounting magic. All large newspaper chains have repeatedly guided their revenue expectations down this year, in fact, as they have been assaulted with higher input costs across the board, from newsprint (up 10%-plus this year) to gas for delivery trucks.
You might think witnessing this sort of corporate disintegration is akin to seeing buggy-whip manufacturers disappear. Yet there is an important distinction. Although investors put railroads out of their minds following the advent of jet aircraft and truck travel, those rail carriers have found their own place in the financial ecology, as low-cost haulers of large loads. Newspapers will, no doubt, also ultimately settle into their own place as the bulk provider of low-cost advertising targets.
Testing investors' patience
Some of the country's top value buyers have been high on newspapers for several years. Bruce Sherman, head of the successful Private Capital Management Group -- early owner of Qualcomm (QCOM, news, msgs), Apple (AAPL, news, msgs) and Computer Associates (CA, news, msgs) during their grimmest years has touted the fantastic cash flows of newspaper chains.
The money-management firm, now a unit of Legg Mason, is the largest institutional holder of Gannett, with a 5.8% stake, and Knight-Ridder, with a 19% stake. In a public filing on Tuesday, Sherman wrote: "We view the best interests of the shareholders as being served by the Board soliciting competitive bids for the Company, either from financial buyers willing to pay fair value or industry participants that would realize synergies and increased market presence through the acquisition of Knight-Ridder's highly desirable local newspaper and online advertising assets... We understand through publicly available material that Company management has, on several occasions, determined the Company's break up value to be substantially in excess of the current share price."
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