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Few sectors have performed worse over the past decade than daily newspapers, which were once lauded as can't-miss "franchise" investments — local monopolies that could raise prices practically at will. In 2004, for example, Gannett (GCI), the nation's largest newspaper chain, earned $1.3 billion, or nearly $5 per share, on revenues of $7.4 billion, and its stock reached $91. Its papers were money machines, with profit margins resembling those of software companies. Today, Gannett's revenues are down by one-third and its profits by two-thirds, and the stock trades at $30. Gannett's market capitalization is $6.7 billion, or about one-sixth that of Yahoo (YHOO).
Gannett's decline would be even steeper if it were a pure play on daily newspapers. In addition to 82 dailies, the company owns dozens of small-town weeklies, which have weathered the media storm much better than dailies; trade magazines with well-protected niches; 23 television stations, which remain nicely profitable; and most of CareerBuilder.com, a job-search Web site.
For daily newspapers, the Internet has so far proved to be an almost insurmountable challenge. Even counting sales from company Web sites, advertising revenue has plummeted, from $49 billion in 2006 to $22 billion in 2012.
The devastation is broad and deep. Can newspapers come back, the way railroads have? Or are they the buggy-whip manufacturers of our time?
After years of ignoring the threat of new technology, publishers are finally trying to engage it, but success has been limited. One big problem has been integrating newsprint and digital delivery. Readers are used to getting information free on the Web, and so far only the New York Times and the Wall Street Journal, which is more a trade publication than a conventional daily, have achieved significant gains in paid Internet subscriptions. After much trial and error, the Times now has 727,000 paying online subscribers. But that has not translated into improved advertising revenues, which dropped 2% in the third quarter from the same period a year earlier.
With solutions elusive, the industry's main response has been to rush for the exits. Last year, the New York Times Co. (NYT) sold the Boston Globe, the dominant paper in New England, for a mere $70 million to the principal owner of the Boston Red Sox, financier John Henry. The company had bought the Globe in 1993 for $1.3 billion. Around the same time, the Washington Post Co. sold its eponymous crown jewel to Jeff Bezos, founder of Amazon.com, for a paltry $250 million. The move came after the paper recorded three straight years of losses and a drop in daily circulation from a peak of 832,000 in 1993 to just 480,000.
For investors, these changes are encouraging. Although no one has yet figured out how to earn robust profits with newspapers, someone almost certainly will. Smart people are concentrating on the problem, and in business, revolutions come from without — from a Henry or a Bezos. Or from John Georges, who bought the Baton Rouge Advocate and has started a New Orleans edition to take on the Times-Picayune, which went to three-times-a-week publication in late 2012. Or from Aaron Kushner, who acquired Freedom Communications, owner of the Orange County Register, among other papers, in 2012. He now says he will launch a new daily to compete with the dominant but struggling Los Angeles Times, part of the Tribune Co. chain, which emerged from bankruptcy reorganization in 2012.
What the business emphatically does not need is the complacency and arrogance that characterized newspapers in the second half of the last century. Not long ago, Warren Buffett touted the big-city newspaper as an "economic franchise" that can "regularly price its product or service aggressively and thereby...earn high rates of return on capital. ...Moreover, franchises can tolerate mismanagement. Inept managers may diminish a franchise's profitability, but they cannot inflict mortal damage." The truth is that unimaginative managers, not just the likes of Craigslist, Facebook and CNN, have inflicted near-mortal damage on newspapers. If newspapers ever were franchises, they aren't today.
The problem is that you can't invest with potential revolutionaries such as Georges and Bezos (who owns the Post personally, not through Amazon). And although Berkshire Hathaway, the company Buffett heads, bought 25 dailies from Media General (MEG), they account — along with a handful of other dailies, such as the Buffalo Evening News — for a minuscule proportion of Berkshire's revenues. But you can buy shares in a few newspaper companies at depressed prices in hopes that revolutionaries may eventually take them over, either through buyouts or management changes.
The McClatchy Co. (MNI) owns some excellent brands. The Charlotte Observer, Miami Herald, Kansas City Star and Sacramento Bee are among its 30 dailies. The stock, which traded at $76 a share in 2005, is now $3. The balance sheet, quite frankly, stinks, and few analysts cover the company. But if an entrepreneur wants to get into the newspaper business, this is a way to do it cheaply. McClatchy generates annual revenues of $1.3 billion, but the stock's market cap is a mere $294 million. (Share prices are as of December 31.)
Lee Enterprises (LEE) owns 50 dailies and 300 weeklies in the West and Midwest. Once among the most respected chains, its shares have dropped more than 90% since 2004, to $3. Revenues are declining, and profits are nonexistent. Lee is also heavily indebted and cheap, with a market cap of less than $200 million and a price-to-sales ratio of just 0.30 (compared with 1.2 for the New York Times Co.).
A.H. Belo (AHC), with a stock price of $7 and a market cap of $163 million, has been selling off its newspapers piecemeal (it just put the Providence Journal up for sale) but still owns the Dallas Morning News and a few others. But unlike McClatchy and Lee, Belo has no debt. (A separate TV company, Belo Corp., was recently sold to Gannett.)
For a different reason — my faith in the genius of Rupert Murdoch — I like News Corp. (NWS). The company last year split itself in two. One reason was the phone-hacking scandal that led to prosecutions of editors and the shuttering of the London-based News of the World. But the company was also trying to attract investors to the more profitable part of the business (TV and film) consolidated in a spinoff called 21st Century Fox (FOXA), one of my ten stocks for 2014. The newspapers, including powerful brands such as the Wall Street Journal and the Times (U.K.), remained with News Corp. With its stock at $18, News Corp.'s market cap is one-seventh that of Fox, and it appears undervalued.
The New York Times may be the best newspaper in the world, but it still hasn't found a viable business model, and I worry about its hidebound family ownership. I would stay away from Gannett as well; its exposure to TV means the stock is not cheap enough for my taste.
The four newspaper stocks I recommend are all risky. The best approach is to buy them all and hang on for what will certainly be a wild ride. But if the revolutionaries prevail, it should be a profitable one.
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