Newspapers are dead--or are they? A. H. Belo (NYSE:AHC), which runs and owns three metropolitan daily newspapers, has more than doubled its share price over the past year. It currently trades at 1.6 times its price to book value, and cash and cash equivalents account for about a third of its current market capitalization. Does A. H. Belo still offer good value at its current price?
Good, local content still wins
While there is no denying the fact that newspaper circulations are falling, not all newspapers have been affected by this to the same extent. In particular, local newspapers that serve certain niche geographical regions and communities of interest tend to perform better than their national counterparts.
A. H. Belo has stemmed its declines in circulation as it saw declines of 2.4% in circulation revenues for both 2012 and 2013. More importantly, A. H. Belo's flagship publication The Dallas Morning News actually increased its daily and Sunday circulation volumes by 1.5% and 1.7%, respectively, in 2013.
Although A. H. Belo attributed the increase in circulation volume for The Dallas Morning News to increased reported digital subscribers, investors should not ignore two key reasons for the resilience of the paper.
Firstly, The Dallas Morning News has been very dominant in the Dallas/Fort Worth metroplex because of its localized content. Estimates have found that about three in 10 people who live or work in the region read The Dallas Morning News; and The Dallas Morning News competes with only one other metropolitan daily newspaper.
Secondly, good content still matters to readers. The Dallas Morning News has won nine Pulitzer Prizes, and A. H. Belo hasn't let up on its efforts to boost its editorial content. In 2012, A. H. Belo invested approximately $35 million in The Dallas Morning News' newsroom, with the bulk of the investment going to staff costs.
The importance of localized content also receives validation from the circulation numbers of peer McClatchy (NYSE:MNI), which prides itself on its market-leading position in the small communities where it publishes newspapers. In 2013, McClatchy saw the Sunday circulation volume for its publication The Sacramento Bee increase by 17% to 311,329. This was on top of 16% growth in 2012.
In addition, McClatchy's The Fort Worth Star-Telegram experienced increases of 9% and 17% in Sunday circulation volume in 2013 and 2012, respectively. The Fort Worth Star-Telegram serves the western half of the Dallas/Fort Worth metroplex, while A. H. Belo publishes The Dallas Morning News for the eastern half.
The numbers from both A. H. Belo and McClatchy show that newspapers that produce niche content for local readers and don't face significant competition remain relatively resistant to the secular decline in newspaper circulation.
Diversifying into digital marketing
In difficult times, it pays to diversify. While print advertising used to account for three quarters of A. H. Belo's top line in 2007, it now contributes about half of the company's revenue. Although the large decrease (about half) in overall revenue for the company played a big part in the change in the revenue mix, investors should also recognize A. H. Belo's diversification efforts in the area of digital marketing solutions.
A. H. Belo started 508 Digital in March 2012, which targets more than 200,000 small and medium businesses in the Dallas/Fort Worth market with services such as search engine optimization, mobile advertising, email marketing, website development, and advertising analytics. In 2013, 508 Digital signed on 600 local advertisers, and more importantly, over 80% of them were 'new' clients who didn't advertise with The Dallas Morning News previously.
Similarly, Gannett (NYSE:GCI), which publishes the national newspaper USA TODAY, has also stepped up its efforts in the digital marketing space. In August 2013, Gannett rebranded its digital marketing services business as "G/O Digital." G/O Digital's full suite of products and solutions include daily deals site DealChicken, digital-shopping app Key Ring, and BLiNQ Media, which offers optimization and analytical tools.
In 2013, G/O Digital also helped office supply chain store Staples create a custom marketing campaign to grow its in-store foot traffic and sales over the next three months. Recent results have been encouraging, as G/O Digital saw its revenue rise by 70% in 2013.
Given the significant amount of cash and real estate on A. H. Belo's balance sheet, investors will find it worthwhile to evaluate the company's capital allocation policies.
Firstly, notwithstanding the relative strength of its newspapers and its digital initiatives, the company does not have attractive growth opportunities. Hence, it provides comfort to know that A. H. Belo has returned excess capital by consistently paying out a minimum of $0.24 per share in dividends for the past three years; its forward dividend yield is an attractive 2.8%. A.H. Belo is also considering share repurchases as a means of rewarding shareholders as well.
Secondly, A. H. Belo disclosed on its most recent earnings conference call that it will proceed prudently with future acquisitions and it will retain a certain cash buffer. This will ease investor concerns that A.H. Belo will splurge all of its cash on M&A activities.
Thirdly, significant non-core real estate assets appear as held for sale on A. H. Belo's balance sheet, and they represent about 10% of the company's market capitalization. These assets include former production facilities and parking lots in Dallas, Rhode Island, and California.
Foolish final thoughts
A. H. Belo's core newspaper business remains resilient and the company has also diversified into digital marketing. With cash & cash equivalents and non-core real estate making up approximately 40% of its market capitalization, A.H. Belo also enjoys significant downside asset protection which makes it an attractive investment even at its current price.