Newspapers Are Hot Stocks — No, Really

But several challenges remain for this beleaguered industry

   

While investors were fretting over Europe and obsessing over Wall Street’s latest soap opera, guess what sector has been rallying? Newspaper publishers.

This is not a joke.

But don’t ignore the secular challenges these companies face — there are opportunities for upside in local markets, to be sure, but I’d expect some fits and starts as the industry reinvents itself in the digital era.

Shares of Gannett (NYSE:GCI), the largest newspaper publisher, have surged about 40% this year, as has The New York Times Co. (NYSE:NYT). McClatchy (NYSE:MNI), whose papers include The Miami Herald, was up almost 21% (before plunging 9% in Thursday’s trading) and E.W. Scripps (NYSE:SSP), owner of The Commercial Appeal in Memphis, is up almost 38%. Interest from Warren Buffett has pushed up shares in Lee Enterprises (NYSE:LEE), whose papers include the St. Louis Post-Dispatch, to more than double in value. The S&P 500, for comparison, has climbed about 16% year-to-date.

There are several reasons this unloved sector is getting some attention. First, reports of the industry’s demise were somewhat overblown. Though some companies are indeed exiting the business, remaining players don’t seem to have trouble attracting buyers given the fire sale prices they are generating — see Buffett, among others.

Earlier this year, his Berkshire Hathaway (NYSE:BRK.A) holding company acquired most of the newspapers owned by Media General for $162 million. He also has nearly doubled his stake in Lee Enterprises. The Buffett effect is certainly benefiting the whole sector, though the Oracle of Omaha seems content with the papers he owns and may not harbor grand ambitions to become the digital era’s William Randolph Hearst. Papers in Philadelphia and New York state have also recently changed hands.

While the change from print to digital has been wrenching — as evidenced by the bankruptcy of the Journal Register Co. and the cutbacks in print editions at some papers — the industry is evolving. Papers are rolling the dice on new businesses such as tablet subscriptions, which are showing promise … though they are nowhere near large enough to offset the decline in print advertising, which slumped to less than $24 billion in 2011 from $49.4 billion in 2005.

“The business model that sustained newspapers wasn’t working anymore,” said Caroline Little, the head of the Newspaper Association of America, in an interview, “What we are seeing is a great willingness to expand in other areas to drive revenue.”

Some publishers have set up small boutique advertising agencies that advise clients on how to develop online advertising campaigns. Papers are in a good position to capture the rising spending on local online advertising. Companies such as Gannett and Scripps are also benefiting from non-newspaper media businesses, such as local television stations and cable networks. Of the two, investors might want to add Gannett, which recently reported better-than-expected results, because it offers a fat 4.3% dividend yield.

But make no mistake — newspapers are not on the cusp of a new renaissance. Their struggle for relevancy is far from over. Think of the industry as like a patient in the hospital that’s been moved out of the ICU. His medical condition may not be dire, but he isn’t out of the woods yet, either.

The stocks’ rise from fire-sale prices has been nice to see, but I’m looking for tough times ahead.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.


Article printed from InvestorPlace Media, http://investorplace.com/2012/10/newspapers-are-hot-stocks-no-really/.

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