If you think of newspaper publishers as crumbling companies being marginalized by Internet news outlets, you would be mostly right. Research firm PWC estimates that worldwide newspaper revenues declined nearly 1% in 2014 and will keep sliding through 2019. Circulation might rise 1% during that period, but only due to the replacement of premium titles with lower-cost equivalents in emerging markets.
Despite that gloomy forecast, several top newspaper companies are evolving from print to digital models and could survive the paradigm shift. Let's take a look at two potential survivors -- the New York Times (NYSE:NYT) and News Corp (NASDAQ:NWS).
The New York Times: Humbled, not crippled
Just a few years ago, the New York Times' future looked bleak -- circulation and ad revenues were plunging, and its digital strategy wasn't evolving quickly enough. To cut costs, it sold the Boston Globe, which it had bought for $1.3 billion in 1993, for just $70 million in 2013. It also laid off employees and hired new execs to shift its focus toward digital and mobile growth.
After being downsized and streamlined, the New York Times started to recover. Last quarter, its revenues rose 0.7% annually to $367.4 million and beat estimates by $2.7 million. It reported net income of $9.4 million, up from a loss of $12.4 million a year earlier. Adjusted earnings tripled to $0.09 per adjusted share, which topped expectations by three cents.
During the quarter, the Times added 51,000 digital subscribers for a total of 1.04 million subscribers -- its biggest quarter of net additions since the fourth quarter of 2012. Total circulation revenues rose 1.1%, but advertising revenues slipped 2.1% due to a drop in digital advertising revenue. Despite that decline, CEO Mark Thompson believes that digital advertising will "return to growth in the fourth quarter." Furthermore, he believes that the Times can double its annual digital revenue to "around $800 million by 2020," which would be equivalent to about half of its expected sales for fiscal 2016. By comparison, digital revenues account for about a third of its top line today.
Those numbers are encouraging, but the stock's P/E of 52 represents a high premium to the industry average of 15 for the newspaper industry. Therefore, investors should keep an eye on the New York Times, but realize that its stock is pricey and a turnaround won't happen overnight.
News Corp: Split up and streamlined
Two years ago, News Corporation, one of the biggest mass media companies in the world, split into two companies -- 21st Century Fox (NASDAQ:FOX) and News Corp. Fox retained most of the company's film, TV, and new media holdings, while News Corp kept news and publishing properties like the Wall Street Journal, News UK, the New York Post, and book publisher Harper Collins.
Over the past 12 months, shares of Fox have fallen 6% as shares of News have risen 4%. Fox was weighed down by concerns about cord cutters, while News Corp pivoted its print model to digital and mobile outlets and divesting non-performing businesses.
Last year, News Corp's revenues inched up 1% to $5.7 billion as EBITDA rose 11% to $852 million. In September, News agreed to sell Amplify, its money-losing digital education unit, which caused a $371 million writedown in the fourth quarter. For the full year, News Corp's circulation/subscription and ad revenues respectively declined 4% and 10% annually. Its top newspaper, The Wall Street Journal, had 700,000 digital-only subscribers at the end of the year, which represented just a third of its paid subscriber base. During the fourth quarter conference call, CEO Robert Thompson admitted that "advertising remains challenging" for several of its major newspapers.
News Corp's results don't look great, but the company has been diversifying its business with new acquisitions. In September, it bought social-video ad platform Unruly to generate more digital ad views. In early November, REA Group, an Australian real estate website firm majority owned by News Corp, agreed to acquire its smaller rival iProperty for around $414 million. That move should strengthen News Corp's digital real estate unit, which generated 7% of its revenue and nearly a fourth of its EBITDA last year. With a P/S of 1, News Corp is a slightly cheaper stock than the New York Times, which trades at 1.4 times sales.
Newspapers aren't dead yet
The newspaper industry still faces a murky future, but the New York Times and News Corp were resilient enough to survive as rivals faded away. If both publishers can continue evolving their business models toward digital solutions, the upside potential of their stocks might outweigh the downside over the next few years.