The News About Newspapers: It’s ‘Less Bad’

by Jonathan Berr | May 17, 2013 7:00 am

If someone had predicted a year or two ago that newspaper stocks would outperform Apple (AAPL[1]), they would have been pilloried from one end of the Internet to the other. After all, Apple was synonymous with “cool” and “cutting edge,” while articles about newspapers often included the words “dead” or “dying.”

Well, a funny thing happened: Apple lost its “cool,” and newspapers have proven to be more resilient than anyone expected — including me.

The Washington Post Co. (WPO[2]) and Gannett (GCI[3]), the nation’s largest newspaper publisher, have surged more than 24% and 20% year-to-date, respectively, to beat the broader markets. The New York Times Co. (NYT[4]) is up 14% — slightly behind but still much more favorable than Apple’s 18% loss.

Even smaller players such as St. Louis Post-Dispatch owner Lee Enterprises (LEE[5]) and Journal Communications (JRN[6]) — whose papers include the Milwaukee Journal-Sentinel — are on a tear, gaining 49% and 28%, respectively. Debt-ridden McClathchy (MNI[7]), owner of the Miami Herald, is more exception than rule at 20% in the red year-to-date.

There are many reasons for the “good news.” First, the industry’s fundamentals are improving slightly as companies attract more digital advertising and subscription dollars. Some publications are even giving print a second look. The New Orleans Times-Picayune — which gained national headlines and sparked community outrage when it announced plans last year to scale back its print edition to three days — recently announced it would once again print daily editions[8]. Owners of The Philadelphia Inquirer recently began selling a Saturday edition on newsstands again after a two-year hiatus.

The Koch Brothers are reportedly interested in acquiring Tribune Co.’s newspapers, including the Los Angeles Times and Baltimore Sun. Although the billionaires are motivated by political concerns, they probably won’t have many financial issues to contend with from the papers. Costs have been wrung out of these publications in recent years thanks to Tribune’s recent bankruptcy. It stands to reason that the papers are profitable, which no doubt makes them even more attractive to the Koches. The last thing conservative owners want to be accused of is funding a money-losing media empire just to stoke their own very considerable egos.

Although print is dying, it still is a big business. Data from the Newspaper Association of America[9] shows that total industry revenue dropped 2% last year to $38.6 billion, which given the uncertainties regarding the economy, isn’t too shabby. Not surprisingly, about 49% of that revenue — $18.9 billion — came from print advertising. A year earlier, print ads accounted for $20.7 billion of its $39.6 billion, about 52%. That’s a small but noticeable improvement.

Independent analyst Greg Huber tells InvestorPlace that investors are a fan of paywalls, though they have been more successful at higher-end publications such as The New York Times and The Wall Street Journal because they provide readers content that they can’t get elsewhere. Positive comments from Warren Buffett have also helped these stocks. Last year, the Oracle of Omaha snapped up 63 papers[10] from Media General (NYSE:MEG[11]) for $142 million. He also is a holder of Lee Enterprises and the Washington Post.

Many investors might not realize that newspaper publishers are surprisingly diversified, which is also helping their share prices. Virginia-based Gannett, parent of USA TODAY, owns 23 television stations. The Washington Post owns six television stations and the Kaplan for-profit education company — a business that has come under tighter government regulations in recent years. Journal Communications owns 15 television and 34 radio stations in 12 states.

The exception to this rule is The New York Times, which has been selling off the assets not directly tied to its flagship paper, such as and the Boston Globe. The Grey Lady’s digital push has been widely successful, attracting 676,000 subscribers, most of whom are paying the full price for access, according to Huber. Even so, the stock is a difficult one to recommend given the tight control the Sulzberger family has over the company.

Yet at the end of the day, there is only one stock worth owning in the sector — Gannett, whose deciding factor is a fat dividend yield of 3.6%. The rest are too expensive or too fundamentally weak (or worse — both) to consider.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Follow him on Twitter at @jdberr.

  1. AAPL:
  2. WPO:
  3. GCI:
  4. NYT:
  5. LEE:
  6. JRN:
  7. MNI:
  8. it would once again print daily editions:
  9. Newspaper Association of America:
  10. Oracle of Omaha snapped up 63 papers:
  11. MEG:

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