by Tom Taulli | July 17, 2012 11:06 am
It seems kind of crazy — that is, to purchase the shares of a newspaper publisher. Isn’t the industry headed for extinction? The answer is certainly “yes” as the Internet onslaught continues and millions buy Apple (NASDAQ:AAPL) iPads. But there’s still some hope. After all, the deterioration may take awhile, even a decade or more. In the meantime, investors could fetch some tidy returns.
Keep in mind that the newspaper industry has been attracting savvy investors, such as private equity firms. And, yes, even Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) has been getting aggressive. A few months ago, Warren Buffett shelled out $142 million for most of the newspapers owned by Media General (NYSE:MEG).
As expected, the buzz was that Buffett was doing this more out of nostalgia (he still loves reading physical newspapers). But if you look at his track record, he doesn’t let such trivialities color his investment decisions. Rather, Buffett is constantly looking for great values.
And Media General isn’t the only newspaper publisher that looks interesting. Perhaps the more compelling play is Gannett (NYSE:GCI), which is the industry’s No. 1 company.
Consider that it has produced decent returns for shareholders. For the year so far, the stock is up about 10%.
OK, so what would be some of the reasons for investing in Gannett? Here are three:
Business Model. Gannett is rolling out new subscription plans for its digital services. While it’s still early in the process, the company has been hitting its internal goals.
Charging for digital content is no easy feat. But Gannett has some big advantages, such as strong brands and unique local content. USA Today Sports is another key franchise.
Yet the digital business is more than just content. Gannet also has other online properties, such as CareerBuilder and ShopLocal. And it has equity interests in ventures like Cars.com and Apartments.com.
In all, the digital business accounts for nearly a quarter of revenues. And to help push things further, Gannett recently hired Larry Kramer and Dave Callaway, who are pioneers of online publishing and information. Both helped to build Dow Jones’ MarketWatch.
Short-Term Catalysts. The upcoming London Olympics have already generated substantially more revenues than the Beijing games. And yes, the presidential election will be a nice ad-revenue generator. As seen with the brutal attacks already between President Barack Obama and former Governor Mitt Romney, huge spending on political attack ads is inevitable — which the “super PACs” will fuel with even more dollars.
Valuation. The stock is cheap. Gannett trades at only 5 times EBITDA, and the dividend yield is at an attractive 5.6%.
No doubt, Gannett has lots of challenges. The traditional newspaper business will decline, and it’s not clear yet how well the subscription model will work out. The slowing U.S. economy will also be a drag.
Despite all this, Gannet does have some positive factors, and the valuation is definitely attractive. In other words, it could be interesting for someone looking for a speculative play.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
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