Gannett recently announced plans to eliminate 1,000 jobs and its stock popped 11 percent in response to the news. A former newspaper colleague...
Gannett recently announced plans to eliminate 1,000 jobs and its stock popped 11 percent in response to the news.
A former newspaper colleague of mine later dropped me an e-mail saying he had long been thinking of getting out of his former employer’s stock and wondered if there was a rally in the offing.
“The stock was bad last year and now it has been cut in half this year,” he wrote. “I’m hoping for a rebound, maybe to get me back some of these losses. Is [the one-day] rally a sign that it hit bottom?”
No, and at the risk of biting the hand that feeds me (through syndication of my columns), it’s not just Gannett that hasn’t hit a low, it’s newspaper stocks in general, as the entire genre can add “Stupid Investment of the Week” to the seemingly endless string of bad news headlines in the industry — an industry that not only will get worse before it improves, but which may be so sick that improvement never comes.
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Stupid Investment of the Week highlights the concerns and characteristics that make an investment less than ideal for the average investor and is written in the hope that showcasing problems in one business will make trouble easier to see elsewhere. While obviously not a purchase recommendation, neither is the column intended as an automatic sell signal, as there may be times when unloading a problem investment creates a whole new set of issues.
Newspaper stocks are a hard pick for me because I grew up on papers and want more than anything for the companies to have a strong, solid future.
I also spent about 20 years in the newspaper business for a number of different companies — though I long-ago sold whatever stock I owned in those past employers — and my columns appear in many newspapers owned by the media firms I’m writing about here. (The Seattle Times Co. is a privately held company, but McClatchy, a publicly traded company, owns a 49.5 percent stake in it.)
It’s important to note that the stocks I single out as “newspaper stocks” are those where the predominant business or source of revenues comes from newspaper publishing. As a result, it doesn’t include my current employer, News Corp., which owns MarketWatch and publishes The Wall Street Journal, because its focus is much more on television; likewise, I’d exclude The Washington Post Co., which due to subsidiary operations is more of an education company that happens to own a newspaper.
Gannett, Lee Enterprises, Gatehouse Media, Tribune (which was taken private in a buyout by billionaire financier Sam Zell), Belo, E.W. Scripps, McClatchy and The New York Times are all facing similarly crippling problems.
Depending on their individual debt picture — it’s much worse for some than others — they’re likely in for a devastating market cycle where the worst is yet to come.
The wicked downward spiral is being driven by a poor advertising climate, which is piling on a circulation decline that has been under way for years.
The competition from other media, especially the Internet, has accelerated the declines on both counts. The newspapers then respond by cutting costs — although items like newsprint can’t be eliminated and have seen dramatic increases as energy prices skyrocketed — and scaling back on people.
From the standpoint of the printed product, however, you can only do so much cutting before you’ve gone through the fat and hit the sinew and the bone.
The one thing papers have going for them is a local news staff, covering the kinds of important hometown events that readers want to know about but which they can’t get anywhere else; trim your staff and you can quickly strip away your ability to provide enough unique readership opportunities.
Losing that key attractive element, in turn, leads more readers to believe they can get the same quality of news without reading a paper and starts the cycle over again.
While many papers have turned to online media to try to make up for the change — and report big percentage growth in online revenues — it’s not enough to keep up.
“For every dollar they lose in print-ad revenue, [newspapers] online operations, industrywide, are recapturing maybe 14 cents,” says Tom Corbett, who follows media companies for Morningstar, the Chicago-based independent research firm. “These are companies trying to keep their heads above water.”
“Cutting costs in the face of declining revenues is a survival mechanism, not a buy signal,” Corbett adds.
Indeed, in that survival mode, Gatehouse has cut its dividend, and ratings service Moody’s has suggested that The New York Times needs to follow suit or face the prospect of having its bond issues downgraded to junk status.
McClatchy joined Gannett in recent layoffs, and joined Lee and Scripps in having seen its stock shed more than two-thirds of its value thus far in 2008.
Some newspaper companies have high debt levels, which can become poisonous when revenues are flat or declining.
“The business model is taking on water, and the companies will change because they have to,” says Corbett, “but cutting back on employees or eliminating sections to cut down on newsprint are not going to be the moves that change things for newspapers. They’re just helping them stay afloat right now.”
Chuck Jaffe is senior columnist for MarketWatch. He does not own or hold short positions in any securities covered by Stupid Investment of the Week. If you have a suggestion for Chuck Jaffe’s Stupid Investment of the Week or a comment about this week’s column, you can reach him at firstname.lastname@example.org or Box 70, Cohasset, MA 02025-0070.