The newspaper publishing industry has been struggling to maintain its past growth, ever since digital news sites entered the market segment. With declining advertisement dollars, several industry giants have had to cut costs in order to reduce losses, making investors uneasy about future profitability. The New York Times Company (NYT) is one of the companies that has suffered the most, causing investment gurus like Steven Cohen (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) to sell out their company shares. But what will the future hold for this firm and will it be able to overcome secular headwinds?
A Strong Brand, Losing Power
The New York Times has enjoyed a strong financial trajectory for over a century, at the hand of its core asset, the New York Times newspaper, and other assets like the International Herald Tribune or the Boston Globe. However, after the economic crisis of 2009, the company had to divest most of its noncore assets in order to fund debt and pension obligations, leaving the Times newspaper and content websites as the main revenue generators. Despite the economic recovery, results remained pressured, with a 25% decline in sales between 2007 and 2010, due to advertisers and subscribers migration to alternative digital media sites. And today, the once 60% revenue income provided by advertising has fallen to 45%, with circulation accounting for the remaining 50% of sales.
Now, the New York Times benefits from its brand strength as one of the best-positioned news publications in the domestic and international market. As such, it captures a vast and affluent audience, willing to pay high subscriber fees for product consumption. However, circulation growth has been stagnant when compared to the previous decade, in spite of the firm’s efforts to develop its digital platform. While the online paywall, implemented in 2011, boosted growth in both the digital and print subscriptions (currently 760,000 subscribers), the low-single-digit growth rate is expected to decelerate looking forward. The company’s efforts to expand digital revenue by adding differentiated content, via videos, branded blogs and interactive content seems promising, but may not succeed if customers decide to switch to other free or low-cost alternatives.
Vulnerable Advertising to Affect Valuation
One of the New York Times’ largest concerns is the decline in ad sales. With the emergence of digital media, the media industry’s barriers to entry disappeared, causing advertisers to migrate towards online platforms, like Facebook Inc. (FB) or Twitter Inc. (TWTR). These companies offer more personalized targeted ads, and their lack of investment in original content allows to them to generate ad impressions at a much lower expense. While the Times still benefits from some pricing power, due to its brand strength and circulation, it will be challenging for the firm to expand its subscriber base enough to offset the negative revenue trend since 2007 ($3,195.08 billion fell to $1.6 billion in 2013). However, the company’s recent divestments helped boost operating margins by 9.9% at the end of fiscal 2013, and this metric will most likely sustain itself over the next few years.
Furthermore, despite the firm’s solid returns on capital of 14.2%, I remain doubtful about the New York Times’ future profitability. The negative EBITDA growth of 0.70% is especially worrisome, when combined with a weak dividend yield of 0.55% (compared to the industry average of 2.83%). The company’s stock trading discount price of 12.90x trailing earnings, compared to the industry average of 17.7x, should come as no surprise considering the aggressive industry headwinds. Therefore, I would recommend for investors to think twice before investing in this newspaper titan, at least until digital subscriptions pick up substantially.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.