The publishing industry is shifting the business model towards a circulation-based revenue structure while reducing dependence on advertising. Companies have implemented strategies like diversification and asset divestitures for growing. The S&P Publishing & Printing index increased 43.31% year to date. So let's take a look at two companies in the industry and see which one is doing better and become the better investment.
The diversified media and education company, The Washington Post Company (WPO), operates in various segments. Considering revenues reported in 2012, the three main products segments were Education (55% of 2012 revenues), Cable Television (20%), Newspaper Publishing (14%), Television Broadcasting (10%) and other businesses (1%). Each division operates independently and has unique business drivers, so we are going to analyze them separately.
The adjusted EPS was at $8.47 per share from $5.66 in the prior year quarter. Television Broadcasting and Cable Television divisions generated the majority of the Post’s recent profits, where revenue rose 4% and 5%, respectively. The strength is due to high barriers to entry and higher content fees (in cable) and lower retransmission consent fees (in broadcasting) than the peer group. In the Television Broadcasting segment, the income grew was attributable to healthy advertising demand, advertising of NBA finals, and retransmission revenue. The Cable Television division was benefited from higher rates and lower promotional discounts.
A historic profit driver, Kaplan Higher Education is divided in three categories: higher education (52% of segment revenues in 2012), test preparation (13%), and international division (35%). The education division took a plan to lower its costs structure to survive at a very competitive environment from traditional colleges and other for-profit schools. Due to a drop in student enrollment, Education division´s revenue went down 1%. The international division focuses on rapid internal growth and acquisitions in Canada, Ireland, Australia and China. It will not be a surprise that the company continue with this strategy, because Kaplan International´s revenue rose 5% in the same period.
Online advertising is a new source of revenue with advertisers migrating to the Internet. The print advertising revenue fell 4% during the second quarter of 2013 and the Newspaper Publishing segment revenue fell 1% from the year-ago quarter. The Washington Post recently sold the majority of its newspaper business to Jeffrey P. Bezos, founder of Amazon.com, for $250 million, after facing poor revenues in the past years with earnings being under severe pressure since 2005.
The New York Times Company (NYT) also operates in various segments: advertising (45% of total revenues in 2012), circulation (48%) and others (7%). Nevertheless, the company´s focus is on circulation and payment for content (a pay-and-read model for NYTimes.com) and also reduce dependence on advertising. At the start of the year and during the second quarter of 2013 the company had an interesting catalyst rising circulation´s revenues. Despite the efforts made to realign its cost structure in order to increase efficiencies, which have contributed to improve its balance sheet, the main factor of improvement is that the company has divested non-core assets in the last years.
The company's challenges are in the print media segment, because there are a growing number of free online information sources and also the changing in the demand, where consumers prefer other forms of electronic data.
In terms of valuation, the next table shows two of the most used multiples:
|Company||Trailing P/E||Compared to Industry P/E Mean||Forward P/E|
|The Washington Post||48.8||Premium||21.98|
|The New York Times||9.5||Discount||30.67|
Finally, I always like to see the evolution of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: The return on equity.
|Company||ROE||Compared to Industry Mean (=5.4)|
|The Washington Post||5.1||Below|
|The New York Times||21.1||Above|
Bad news for both companies is that I expect newspaper publisher advertising revenues to continue decline in the future and this can be magnified to the effects of economic fluctuations. The Washington Post holds the best market positioning but has difficulties in its Education Division. On the other side, The New York Times faces risk as advertising continues to be a major part of its revenues. For all that we have seen in the article, I prefer the second one over the first one.
Hedge fund gurus like Joel Greenblatt, Steven Cohen and Paul Tudor Jones added this stock to their portfolios, and the three of them sold or reduce their position in The Washington Post. I would advise fundamental investors to consider adding The New York Times to their portfolios as it seems to be an attractive option.
Disclosure: Victor Selva holds no position in any stocks mentioned.
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