This Publishing Company Is Falling Victim to a Vicious Cycle

Editor's note: A previous version of this article used the wrong ticker for Gannett – (NYSE: GNI) instead of (NYSE: GCI). The Fool regrets the error.

The New York Times (NYSE: NYT  ) is a hugely popular brand, but a popular brand doesn't guarantee revenue and earnings growth.

A quick glance at the situation
The New York Times has operated in two segments: New York Times Media Group (The New York Times, International Herald Tribune, NYTimes.com) and New England Media Group (The Boston Globe, BostonGlobe.com, Boston.com, Worcester Telegram & Gazette, Telegram.com).

New England Media Group has recently been sold, as has The New York Times' 49% stake in Metro Boston (free daily newspapers in Boston). These sales are expected to free up approximately $70 million, which will be used for corporate purposes.

In the second quarter, The New York Times saw revenue decline 0.9% year over year to $485 million, mostly due to weakness in advertising revenue. Circulation revenue increased 5.1%, but this was due to price increases, as fewer copies were sold. But the focus here will be on advertising revenue.

The New York Times is capable of gains in digital subscriptions. Actually, revenue for digital-only subscription packages, e-readers, and replica editions jumped 44.1% to $38.3 million. And digital subscriptions improved 40%. But the company needs advertising revenue in order to thrive. 

Advertising revenue
In the second quarter, advertising revenue dropped 5.8%. More specifically, print advertising, which accounts for 75% of advertising revenue, fell 6.8%, mostly due to lower national and retail ad revenue. Digital advertising declined 2.7%, mostly due to declines in Real Estate and Help Wanted classified ads.

Two major headwinds exist:

  1. Web-based display ads are no longer a highly effective option. Instead, companies are opting to buy large audiences via ad networks and exchanges. This industry-wide shift has led to pricing pressure for The New York Times.
  2. The uncertainty of the global economy has led to retailers cutting their spending in order to aid their margins and bottom lines. Retailers don't want to take unnecessary risks if consumers aren't going to react positively to ads. 

If you're wondering about an ad revenue breakdown (declines in parentheses):

  • National: (3.5%)
  • Retail: (12.9%)
  • Classified (8.6%)
  • Other: (5.1%)
  • Total: (5.8%)

Strategies and goals
Currently, The New York Times aims to deleverage its balance sheet. This means that its dividend won't be restored at any point in the near future. Some investors might like at this as a negative, but it actually demonstrates fiscal responsibility.

Looking ahead, The New York Times aims to roll out a digital subscription and paid products strategy in the fourth quarter. This strategy will focus on international expansion, video production and improved brand recognition to drive subscriber acquisitions. This initiative is likely to lead to a $20-$25 million decline in operating profit in the near term, while slightly aiding the top line. But these investments are expected to have full positive effects by late 2014.

The New York Times vs. peers
The short position in The New York Times is high at 15.30%, which is directly related to a declining industry. In most cases, industry trends are more powerful than how well a company is run. Regardless of the reason, below are the top and bottom-line numbers for The New York Times.

 

2008

2009

2010

2011

2012

Revenue (in millions)

2,949

2,440

2,393

2,323

1,990

Diluted EPS

(0.40)

0.14

0.71

(0.27)

0.87

Finding a positive trend in the table chart above isn't an easy task. The New York Times can cut costs in order to keep the bottom line somewhat stable, but that top line must see a turnaround for sustainable stock appreciation.

If you're considering an investment in The New York Times, then you might also be considering an investment in Gannett (NYSE: GCI  ) . Gannett is a larger company, with a market cap of $5.76 billion, versus $1.78 billion for The New York Times.

Gannett is best known for its USA Today brand, and to a smaller extent, Clipper magazine. Overall, it has 82 publications with affiliated online sites. Furthermore, it has outperformed The New York Times over the past three years, with stock appreciation of 131%, versus 58% at The Times. And Gannett is trading at just 8 times earnings, versus 31 times earnings for The New York Times. As if those aren't enough selling points for Gannett, it currently yields 3.20%. These key metrics, as well as brand diversification, are likely to make Gannett a better investment going forward. That said, neither are resilient to broader market corrections, and therefore they should both be looked at with curbed enthusiasm.

News Corp. (NASDAQ: NWSA  ) is also bigger than The New York Times, sporting a market cap of approximately $9 billion. However, while The New York Times has a positive net margin (percentage of revenue turned into profit) of 10.22%, and an ROE (percentage of investor dollars turned into dollars) of 23.23%, News Corp. has a negative net margin of (6.71%) and a negative ROE of (2.63%). The stock is also trading at lofty 32 times earnings.

Some investors refer to News Corp as "The Bad News Corp.," with "The Good News Corp." being Twenty-First Century Fox. But that's a story for another time. News Corp. owns many popular brands, including The Wall Street Journal and New York Post. What might make News Corp a better long-term investment than The New York Times is its tremendous cash position (for its industry) of $1.54 billion, with no long-term debt. Therefore, News Corp doesn't have to rely on organic growth; it has the capability to acquire smaller companies in order to grow.

Conclusion
The New York Times is a tremendously valuable brand name. Therefore, it will likely never fail. However, it's facing difficult times ahead. With advertisers remaining cautious, and the company seeing ad revenue declines in every area, this doesn't look to be the ideal entry point for a long-term investment.  

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