Today I had the opportunity to read Matt Cooper’s article at Portfolio.com on why he thinks The New York Times represents a good buy. Recently, I’ve run few screens and have seen two newspaper
companies appear. They were the New York Times and the Sun-Times Media Group. I feel like the newspaper business is a fascinating one, especially as someone who reads about four different papers daily. The industry is fascinating from an intellectual perspective, but from an investment perspective these companies are lackluster at best. I don’t want to explore SVN too much in this post and would rather focus on some of the points Cooper brings up.
What I like is that Cooper starts the article off by stating he is not a finance guy, but then gives his pretty basic assessment on the situation. Cooper says:
The yield is 5.6%. It’s around its 52-week low. It’s selling for around $16, when it was at $50 in 2001 and around $35 just over two years ago. The market cap of the company is around $2.3 billion which is what a lot of PE firms leave in their desk drawer.
A lot of his argument seems to be based around the brand name of the company and a few basic quantitative assessments with a dose of contrarianism (low PE, good yield, huge price decline). These are good starting points when investigating an investment, but it’s important to dig deeper.
First, I like to look at an overall picture of the industry. Below you’ll see that newspaper circulation has a steady downward trend:
The Industry
Recently, from 2005 to 2006, the New York Times has seen a loss in about 32,000 weekly subscriptions and a loss of 47,000 in subscriptions to the Sunday NYTimes. Circulation is a very important number because while newspapers may not derive most of their revenues from this area (typically you’ll see 2/3’s come from advertising, and a chunk of the remainder from circulation), circulation does in fact have influence advertising. Correction: The Alexa rankings were actually inflated due to the use of subdomains. Looking at the ranking list now, I do see that the New York Times is listed as #32 and their other property About.com is ranked as #31. These are some strong showings.
The Company Level
Cooper mentions Katherine Graham’s The Washington Post as a company of comparison, and also the Wall Street Journal. These two cases provide pretty big contrasts to the New York Times.
When Warren Buffett evaluated The Washington Post, on an industry scale, things were pretty different. Newspapers were dominant forms of media at the time, and the Post had a tremendous moat against any other competitor in that realm. Additionally, the Post had a number of very strong media properties such as television and radio stations. Cooper’s mention of Kaplan is certainly valid.
The WSJ on the other hand, while lacking a huge number of external businesses, offers different value. Eventually, Murdoch will be able to leverage the WSJ’s brand with his Fox Business channel, and the company offers a number of unique Dow Jones services for professionals (such as high priced newswires for traders/investors).
The NYTimes unfortunately is in the realm of general news. When it comes to broadcasting, the players are already extremely established – Fox News and CNN. They have very established brands and would not need the NYTimes’ name as leverage. The NYTimes also owns a couple of radio stations which it has planned to sell and has sold their former headquarters. Still, these moves only create temporary value; we’ve seen consistent declines in operating income (which in 2005 was inflated by the sale of their former HQ). There does not seem to be a clear-cut long term value creation strategy here. The company acquired About.com, which was probably a good thing, but chances are that About.com will not be able to generate enough revenue to carry the company as a whole.
The Financials
Looking at the financials, a few things really stand out to me.
2002 Operating Income — 544,868
2003 Operating Income - 539,550
2004 Operating Income – 462,613
2005 Operating Income – 319,550
2006 Operating Income – (520,611)
From 2002 to 2006, we’ve seen a major decline in operating income. To make matters worse, while operating income has fallen over the past five years, we’ve seen a steady rise in the cost of wages over the last three. Debt-wise, the Times does not seem to be doing very well, with a debt-to-equity ratio of .79 which is 221% the industry average. Over the last three years we’ve also seen declines and plunges into negative growth with Return on Equity and Return on Assets. None of these facts give me a reason to find any compelling value in The New York Times.
Sometimes we’ll see a company sell at a low PE and low PS simply due to the fact that it’s a growing weaker and weaker, which is what I is the case with The New York Times.
Corporate Governance & Acquisition Potential
The final point that Cooper brings up is that a bidder may emerge since the company appears so cheap and make a play. We’ve seen two acquisitions in the newspaper business this year: Dow Jones and Tribune Company. The problem is that both of these acquisitions had better potential outcomes than The New York Times. For the WSJ, Rupert Murdoch actually did not have to worry so much about the Bancrofts. The family’s control on the company was highly fragmented, and he was able to use that to his advantage. Then, like mentioned previously, the WSJ has value when supplanted to Murdoch’s growing media empire, especially the Fox Business channel.
Then, there is the Samuel Zell who is working hard to get the Tribune Co. article to pass. Zell figured out a way to buy the company for less than its intrinsic value—sometimes just by taking them private and applying a new tax structure. The Tribune Co. also had a number of diverse media centered businesses, such as the Chicago Cubs and multiple TV stations. All of these things have helped Zell with the selling process, because he was able to make commitments to sell certain pieces and alleviate his own debt.
Here’s where there’s a major difference. The corporate governance at the New York Times is extremely unfriendly to shareholder value. I felt like this was best exemplified with Hassan Elmasry’s battle with Arthur Sulzberger Jr. over the dual-class structure. The Sulzberger family’s holding of Class-B shares means that they control 76% of the board, making it tough for shareholder activists to make meaningful board changes in order to create value for shareholders. Dow Jones had a dual-class system, but like I mentioned above, Rupert Murdoch was able to out game the Bancroft family and made a bid so large that it would be nearly impossible to turn down. In order for something similar to occur here, a bidder would have to make a huge offer in order to win over the Sulzberger family. The likelihood of this is pretty slim. Most also attributed Murdoch’s huge acquisition cost for the WSJ as being a result of his penchant for owning newspapers – few other investors with the type of capital needed to acquire the New York Times will hold such views, making the company’s acquisition from an outsider highly unlikely.
These factors all seem to make me feel as if the NYTimes would be a poor buy at the moment, and that investors should look elsewhere. I don’t see the possibility of any great improvements with the company unless some drastic actions are taken, or some sort of acquisition occurs – which I’m finding to be highly improbable. If you must own a newspaper, I feel as if the Tribune Co. might be a good choice as a risk arbitrage play.
