Warren Buffett’s Bad Bet on Newspapers

by Lawrence Meyers | May 22, 2012 11:37 am

Set fire to newsprint — that’s all it’s good for these days. In case you hadn’t heard, the newspaper business absolutely stinks. Despite Warren Buffett’s recent bullish investment[1], newspapers are a sunset industry. Why? Because more and more people are getting their news from free online sources.

Buffett’s Berkshire Hathaway (NYSE:BRK.A[2]) just bought out Media General (NYSE:MEG[3]). Well, the Oracle of Omaha must have cracked his crystal ball because apparently he doesn’t see that newspapers are yesterday’s news.

Every metric in the newspaper industry declined from 2006 to 2010[4]. Advertising revenues fell 48% — yep, half of newspaper advertising revenue disappeared. Poof! Classified-advertising revenue fell 60% during the same period because nobody puts classified ads in newspapers anymore. That’s what craigslist is for. Circulation got smacked, too. It declined for 15 consecutive six-month periods from 2003 through 2010. In 1990, daily-newspaper circulation was 62.3 million. In 2010, it was 43.4 million — a 30% decline.

Warren Buffett sees value here. I call it a classic value trap.

Let’s look at Media General’s metrics: losses as far back as the eye can see, including a loss that tripled from $25 million to $75 million in 2011. Losses are expected at least through 2013. Revenue is off 25% since 2008, while selling, general and administrative expenses (SG&A) have risen 27%. Balance sheet?  Let’s see: $658 million in debt that the company is paying 10% annual interest on. Negative free cash flow for 2011.

How can you profit?  Fortunately, Berkshire is a diversified holding company, so it won’t be hurt. But I’d short New York Times Co. (NYSE:NYT[5]). Washington Post Co. (NYSE:WPO[6]) and Gannett Co. (NYSE:GCI[7]) aren’t in imminent danger, but there are many better places to put your money.

Lawrence Meyers does not hold shares in any company mentioned.

  1. Despite Warren Buffett’s recent bullish investment: http://investorplace.com/2012/05/warren-buffetts-shrewd-bet-on-newspapers/
  2. BRK.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK
  3. MEG: http://studio-5.financialcontent.com/investplace/quote?Symbol=MEG
  4. Every metric in the newspaper industry declined from 2006 to 2010: http://stateofthemedia.org/2011/newspapers-essay/data-page-6/
  5. NYT: http://studio-5.financialcontent.com/investplace/quote?Symbol=NYT
  6. WPO: http://studio-5.financialcontent.com/investplace/quote?Symbol=WPO
  7. GCI: http://studio-5.financialcontent.com/investplace/quote?Symbol=GCI

Source URL: http://investorplace.com/2012/05/warren-buffetts-bad-bet-on-newspapers/
Short URL: http://invstplc.com/1nxP4oZ