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Newspaper Publishers
Media Conference Preview
Paul Ginocchio, CFA
Research Analyst
(1) 415 617 4207
paul.ginocchio@db.com
David T. Clark, CFA
Research Analyst
(1) 212 250 3523
david-t.clark@db.com
Matt Chesler, CFA
Research Analyst
(1) 212 250 6170
matthew.chesler@db.com
Cautious on group, particularly large market operators
Ahead of DB's 16th Annual Media Conference, which incorporates the NAA Mid-
Year Media Review, we publish our semi-annual comprehensive look at
newspaper industry trends. Our view of the 2H advertising dynamics remains
negative, as almost every category and vertical is under heavy pressure. We
expect large markets and anyone with a meaningful exposure to FL/CA will
struggle against powerful cyclical/structural headwinds. Our top pick is WPO, and
we have a Sell on NYT. We remain cautious on the group as a whole.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from
local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of
DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to
request that a copy of the IR be sent to them.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Compendium
Top picks
Washington Post (WPO.N),USD610.69 Buy
New York Times (NYT.N),USD17.23 Sell
Companies featured
Gannett (GCI.N),USD28.67 Hold
2007A 2008E 2009E
EPS (USD) 4.39 3.58 3.18
P/E (x) 11.7 8.0 9.0
EV/EBITDA adj (x) 7.8 6.0 6.0
Lee Enterprises (LEE.N),USD6.67 Buy
2007A 2008E 2009E
EPS (USD) 1.65 1.12 0.93
P/E (x) 15.7 6.0 7.2
EV/EBITDA adj (x) 8.4 5.7 5.7
Media General (MEG.N),USD15.13 Hold
2007A 2008E 2009E
EPS (USD) 0.45 0.94 –
P/E (x) 72.9 16.1 –
EV/EBITDA adj (x) 9.6 6.8 –
McClatchy Company (MNI.N),USD9.03 Hold
2007A 2008E 2009E
EPS (USD) 1.51 0.95 –
P/E (x) 17.4 9.5 –
EV/EBITDA adj (x) 8.0 6.1 –
E. W. Scripps (SSP.N),USD46.82 Hold
2007A 2008E 2009E
EPS (USD) 2.26 2.47 –
P/E (x) 19.7 19.0 –
EV/EBITDA adj (x) 9.1 8.8 –
Washington Post (WPO.N),USD610.69 Buy
2007A 2008E 2009E
EPS (USD) 31.35 32.17 –
P/E (x) 24.9 19.0 –
EV/EBITDA adj (x) 9.7 6.3 –
New York Times (NYT.N),USD17.23 Sell
2007A 2008E 2009E
EPS (USD) 1.08 1.03 –
P/E (x) 20.7 16.7 –
EV/EBITDA adj (x) 9.1 8.1 –
Company
2H comps ease, but we think underlying trends will improve only a bit
Industry-wide ad growth in 2H07 fell to -9.0% after 1H07’s -6.7%, so 2H08 will
face a 230bp easier YoY comp than 1H08. Nonetheless, the underlying advertising
dynamic weakened in 1H08, and we think the poor trends will continue into the
back half of the year. The classified verticals will continue to struggle as a
persistent cyclical drag compounds formidable structural issues (i.e., leakage to
the internet). Small market trends continue to be better than large. Circulation
volume declines may again accelerate, and operating margins will likely fall. The
environment may not get harder for the newspapers, but we see few reasons for
it to improve. There are some potential bright spots – Yahoo! collaboration kicks
into high gear in 2H, as does QuadrantONE and some other smaller interactive
efforts. The inflection point at which online growth can offset print losses is still
years away, but recent moves in the online space are encouraging.
We expect realism from the newspaper execs
Historically the newspaper operators have been a bit over-optimistic at their semiannual
conference appearances in June and December. For the last year or so,
they’ve been more realistic, and we expect the presentations at the DB
conference to be upfront about the challenges facing the industry in the near and
long term. We anticipate an emphasis on digital progress and plans, and efforts to
stabilize margins through a re-scaling of the cost structure, outsourcing, and
reductions in consumption to offset rising newsprint costs.
Newspaper multiples look a bit high given growth profile
With an average 2008E EV/EBITDA of 6.5x, the newspaper multiple seems a bit
high for declining EBITDA. Our sector view is that the stocks are at risk in the near
term due to the tough environment and absence of positive catalysts. We like
WPO for its education/cable, and recommend Selling NYT because of a rich
valuation on the fundamentals, and see little upside from shareholder activism
(and it’s unlikely to go private). Upside risks to our cautious view include a fast
economic recovery, stabilizing newsprint prices, and an acceleration in online
growth augmented by implementation of key facets of the Yahoo! collaboration.
Downside risks include faster migration of readers and advertisers to the internet,
weak job growth/retail sales, accelerating circulation declines, and falling margins
as companies struggle to scale costs to tumbling revenue.
Table of Contents
Investment thesis .............................................................................. 3
DB Media Conference........................................................................ 4
DB view on sector.............................................................................. 6
Macro driver forecasts/trends.......................................................... 8
General advertising trends ............................................................... 9
Retail/Local advertising .................................................................. 13
Classified advertising...................................................................... 16
National advertising ........................................................................ 24
Online ............................................................................................... 26
Circulation........................................................................................ 32
EBITDA margins/costs .................................................................... 37
Financial leverage............................................................................ 41
Appendix .......................................................................................... 42
Multiple comparisons ..................................................................... 43
DCF valuations................................................................................. 44
Value per reader .............................................................................. 45
Sum-of-the-parts valuation............................................................. 46
Circulation data ............................................................................... 47
Newspaper Deals............................................................................. 55
Investment thesis
Outlook: We remain cautious, expect 2H to be a rough ride too
Despite easing comps in the back half of the year, we think newspaper advertising trends will
likely remain very weak in 2H08. Across the category spectrum we see more difficulty, and
few positive catalysts, other than the rollout of important industry digital initiatives. The
classified verticals, facing cyclical and structural headwinds, will likely remain the toughest
category for the newspapers. Retail, typically a less volatile, category, nonetheless has also
shown dramatic deterioration as the economy has slowed. National, a small but not
inconsequential category, particularly for metro dailies, has seen accelerating declines as
brand advertisers have reduced or delayed budgets. On the positive side, we think the
newspapers have finally started to get the interactive strategy right, and we look forward to
seeing what the new Yahoo!-newspaper alliance can do to accelerate online revenue growth
starting this fall.
Given the highly uncertain economic and advertising environment, we remain cautious on the
group. Our top long idea for the sector is Washington Post (WPO), whose education and
cable MSO businesses are growing strongly and tend to do well in tough economic times.
We have a Sell rating on New York Times Co. (NYT), as we think the fundamentals do not
justify the current valuation. We are skeptical about the potential benefits from the current
shareholder activism, and believe that a going-private transaction is unlikely due to the
leverage it would require, which would put the flagship assets at risk in violation of the 1997
Trust Agreement.
Valuations are realistic given near-term growth profile
We value the newspapers based on three (or sometimes four) methods: 1) Our DCF analysis
uses a 3.5% risk-free rate, a 5.0% equity risk premium, and a long-term growth rate of 1.75%
(2.25% for SSP and WPO). 2) Our ROIC analysis projects an expected trading range based on
historical asset multiples (EV/NCI) relative to ROIC/WACC. We believe the newspapers are
currently moving toward a lower trading range, and therefore consider both the average and
the lower end of the range when setting our target prices. 3) We look at several relevant
relative valuation multiples in our analysis, focusing especially on EV/EBITDA and
EV/unlevered FCF. 4) For several of the hybrid newspaper stocks we use a sum-of-the-parts
analysis, which allows us to identify when parts of their business are likely being
undervalued. The companies for which we employ SOTP are SSP and WPO. The newspapers
are trading at 6.5x 2008E EV/EBITDA on average, well below the 8.3x they traded at in 1H07,
and 2004’s 11.0x, but a fair or even a bit high multiple for an industry with declining EBITDA
over the next couple of years. Our ROIC and DCF analyses both suggest a group that is close
to a fair valuation.
Upside and downside risks
Downside risks for the sector include 1) faster migration of advertisers and readers to the
internet, 2) below-expectation job growth and retail sales, 3) accelerating circulation volume
declines, 4) fast-rising newsprint prices and 5) rapidly falling margins as companies struggle
to scale costs to tumbling revenue. Conversely, upside risks to our neutral call include 1)
higher-than-expected job growth, 2) stabilizing newsprint prices, 3) a rapid acceleration in
online revenue growth, augmented by implementation of key facets of the Yahoo-newspaper
consortium deal, and 4) stronger-than-expected online advertising pricing.
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