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Newspaper Stocks: New York Times Company, Gannett and McClatchy

by: Sramana Mitra August 26, 2008 | about stocks: GCI / MNI / NYT    

Sramana Mitra

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U.S. newspaper stocks have been facing the brunt of worsening economic conditions and the attack from digital media. The main sources of their revenues - vertical classifieds - have steadily been moving online. Their response should be to invest in and acquire online verticals, which has happened to some extent. However, it's not enough. As a result, the latest quarterly results of three companies, The New York Times, Gannett, and McClatchy, were representative of the bloodbath their stocks have been experiencing.

Although it continued to retain the number one newspaper website position for June, The New York Times Company (NYT), had a rather poor second quarter as it missed the Street’s revenue forecasts. Revenues for the quarter were $742 million, a marginal sequential decline from $748 million the previous quarter and a 6% decline from last year’s revenues of $789 million. The Street was expecting revenues of $754 million.

However, EPS of $0.26 was better than the Street’s expectations of $0.22. EPS grew 24% compared to the previous year.

Of the three assets of a newspaper, brand, traffic, and ad network, its brand continues to be strong. The Times raised its home delivery and newsstand prices, which were reflected in circulation revenue growth.

Its web traffic is also increasing as the company continues its transformation to the online format. Internet revenues grew 13% over the previous year and generated $91.3 million, or 12.3% of the company’s revenues. Internet advertising revenues generated 18.3% of revenues in the quarter. According to Nielsen Online, NYTimes.com had 17.7 million unique visitors, recording growth of 41% over the year. Its audience is nearly twice the size of the next newspaper website. However, online revenues are not growing fast enough to compensate for the loss of print advertising revenues.

Ad revenues were down 10.6% compared to the previous year. Ad revenues at the news media group decreased 11.8%, with national advertising down 5.7%, retail down 9.5%, and classifieds down 24.4%. Recruitment, real estate and automotive were the sectors that were most affected by the decline in classifieds. Management noted that companies were further tightening its ad spending.

The stock reached a new 52-week low last month when it hit $12.08. It is currently trading at $13.21.

1yr NYT

The other newspaper company committed to online transformation is Gannett (GCI). Gannett has been moving into the online space through various strategic relationships and investments.

As part of its strategy to become the largest local content aggregator and distributor, this quarter it purchased 57.5% of ShopLocal for $7.875 million. ShopLocal is the leader in multi-channel shopping and advertising services. It offers a suite of solutions that connect advertisers and consumers, both online and in-store.

For the quarter, Gannett’s revenues of $1.7 billion met analysts’ expectations. Revenues were sequentially flat, however, and fell 11% over the year.

EPS of $1.01 missed the Street’s expectations by a penny. Sequentially, EPS grew 32% but decreased 19% over the year.

Gannett continued to post gains in its digital operations, with revenues growing 6% over the year. Domestic publishing online revenues increased 3%, broadcasting grew 17% and Newsquest’s growth rate exceeded 25%.

In June, Gannett’s U.S. websites had 23.1 million unique users and reached 14.1% of the Internet audience, and in the U.K., 7.5 million unique visitors with over 95 million page views accessed Newsquest.

The company is expecting the Olympics and the U.S. elections to pull up revenues. It projected a gain of 5%-9% in Q3, but it is obviously feeling the pinch in margins as newsprint prices continued to rise this year.

The company said that it was looking at more strategic acquisitions. Hopefully, the company will pay attention to the gaps I identified and gain presence in the online matchmaking/dating, sports, business and finance, real estate, and auto spaces.

The stock fell to a 52-week low of $14.62 after the results announcement. It has recovered since and is currently trading at $17.67.

1yr GCI

The third-largest U.S. newspaper company, McClatchy (MNI) is not faring any better than its peers. In the recently announced Q2 results, revenues of $490 million missed the Street’s expectations of $495 million and declined 16% over the year. Sequentially, revenues grew by a marginal $2 million.

EPS grew sequentially to $0.21 from $0.02 the previous quarter. The Street was expecting the same results. In the previous year, EPS stood at $0.48.

As for other media stocks, advertising revenues pulled overall revenues down. Ad revenues fell 16.8% in the quarter, driven by a 28.1% fall in classifieds. Circulation revenues were also down 5.2%.

Online, however, is a different story. Online revenues contributed 11.8% of total revenues compared to the 8.6% contribution a year ago. Online retail advertising also grew 80.7% compared to the 7.9% drop in print retail advertising.

McClatchy’s online efforts are worth noting. According to the company:

A decade ago, most of our online ads were up sells from print or a combination buy with print. In 2006, 70% of our online revenues were tied up with print. And now year-to-date nearly 50% of our online revenues come from ads that are placed online only.

This is significant because the company is establishing a separate, independent business from its print product - a trend that I have been talking about.

McClatchy has been focused on diversifying its revenue stream and have gotten into direct marketing opportunities with niche publications and with special direct mail pieces. For example, in Kansas City the company launched a new young reader publication earlier this year and expect it to generate over $2 million in revenue this year.

The company continues to maintain its online and local focus. The company sees itself as a local media company, maintaining its mass reach and leading local online sites in targeted advertising vehicles and targeted direct mail. The company realizes that with online, it can go down to individual or database marketing and with the newspapers still keep its broad reach. The company doesn’t see print going away soon, but realize that the print business will need to be smaller and a more cost-efficient one.

The stock hit a new 52-week low of $3.30 last week and is currently trading marginally higher at $3.58. A year ago, the stock was trading at a 52-week high of $23.58.

McClatchy chart

Disclosure: None

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This article has 9 comments:

  •  
    Aug 26 02:22 PM
    Good review, but the implications of prints having lost their appeal in ads, and much else as well, it really not just technology and the easy of the internet, but also the tasteless editorial bent of most of the press. So lop sided they make the word "unbalanced" seem a complement. Should we feel poorer or threaten if the prints take gas, or god forbid, cease to exist? No they have been making assumptions which have been grossly in error and some how they missed the consequences. Yes, part is technology, but part is retribution. Z
    Reply
  •  
    Aug 26 09:14 PM
    would it be the end of the world if the "times" folded.i havent bothered with this rag since they endorsed castro in the eisenhower years.i managed well.
    Reply
  •  
    Aug 26 10:38 PM

    As long as "Pinch" is in charge there is no hope for the NYT. He is more interested in advancing his social agenda than in turning a profit. The company and it's stock suffer as a result.
    Reply
  •  
    Aug 27 12:13 PM
    notsosmart: Let me guess....You're retired, live in red-state America, and no college degree. Right?
    Reply
  •  
    Aug 27 03:40 PM
    Excellent article and it points out, to me at least, that Gannett is more diversified than the other newspaper companies and appears as though that stock is stupendously undervalued and due for a nice run to the upside.

    Jay Fredrickson

    chicagocheap.com
    Reply
  •  
    Aug 27 05:51 PM
    Jay, what leads you to believe Gannett is undevalued? 80% of revenue comes from print advertising, and that revenue is declining by doub;e-digit percentage figures. Where is the growth and profitability that will drive the stock price?
    Reply
  •  
    Aug 27 06:32 PM
    This author seems confused. She bills herself as a Silicon Valley-based corporate strategist. However, her piece seems to ignore the limitations of newspapers' online business.

    She neglects to mention that despite impressive percentage revenue growth online, that growth is decelerating, and is occurring off a small base. In other words, gains online are not keeping pace with losses in print ad revenue.

    The author further neglects to mention that McClatchy may be cutting its dividend by the end of the year if not sooner, so it will free up cash to service its $2.1 billion in long term debt from its poorly-timed Knight Ridder acquisition. Interest expense alone has consumed 80% of McClatchy's operating income so far in 2008.

    McClatchy has been scrambling to cut costs - including an outsourcing initiative to a firm in India. It also just offered buyouts to a large number of employees at the Sacramento Bee.

    McClatchy and other publishers may be establishing a separate, independent business from their print product, but that business is not growing quickly enough - or profitably enough - to support the high fixed costs associated with the current print infrastructure. Profitability continues to decline, and advertisers will not pay up for the same ad online that they purchased in print.

    Where was all this mentioned in the author's article?
    Reply
  •  
    Sep 01 02:00 PM
    I think Gannett is undervalued due to their tv staions, overseas operations, and national branding opportunities with USA Today. This company also owns a lot of tv stations and should be able to max revenue from those stations once the economy bounces back. I also think they are in a good position relative to others in newspapers, like Mcclatchy, New York Times, and Tribune, and may be able to buy some choice titles as those companies start shedding assets to pay off their huge debt not able to be served by future cash flows.

    Jay Fredrickson

    I-10west.com
    Reply
  •  
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