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The business of newspapers, especially local ones, is a relatively attractive one. In fact, in the pre-Internet days, owning a local newspaper was just about the best cast iron guarantee to make money you could find.
Warren Buffett recognised the attractions of local newspapers long ago. He realised that once established, it was difficult for any startup newspaper to ever overcome an entrenched leader. People just don't change their newspaper-reading habits. So, as the only game in town, a local newspaper had an advertising "grip" over the community and business. If you wanted to advertise to sell your house or car, you only had one mass-market choice. The local paper.
The really great aspect of newspapers is the economics. If you kept the supply of advertising space constant, any rise in advertising demand, say from a housing boom, would mean higher advertising rates. And without any associated cost borne by the newspaper proprietor to increase these rates, all the extra revenue fell to the bottom line. An example of these characteristics can be found in more detail with this review of Southnews (LSE: SNW) for the Qualiport.
Anyway, on to Johnston. With like-for-like advertising rates up 5%, continuing turnover rose 5% to £202m and the P&S acquisition brought in another £38m. Underpinning the advertising characteristic above, underlying operating profits outstripped sales, to rise 12% to £56m. P&S added a further £9m and it all led to basic earnings per share at Johnston increasing by 9% to 17.16p.
Although newspaper barons can rely on a buoyant economy to boost their profits short-term, long-term profit growth comes from acquisitions. Just as people aren't likely to change their favourite paper, so people aren't likely to start to regularly read a paper either.
As the newspaper industry consolidates, this growth by acquisition route to riches becomes ever more hazardous. Not least because bigger and bigger rivals need to be swallowed to keep the growth momentum going. Johnston at the moment are in a three-way battle for News, Communication and Media (LSE: NCM), a fellow local newspaper publisher. Johnston, Trinity Mirror (LSE: TNI) and Gannett (NYSE: GCI) are all awaiting the report from the Competition Commission over the prospective bids. Part of the problem for Johnston and the other suitors is the apparently outdated Fair Trading Act. Johnston comments today that the Act is "increasingly anachronistic in a world of e-commerce and digital communication, particularly as its strict conditions apply only to newspaper publishers". Johnston is playing an active part in trying to relax this current regulatory framework.
But Johnston aren't just twiddling their thumbs while waiting for a government decision, with the ubiquitous online ventures announced this morning. Recognising that for the majority of people, "life is local", Johnston have implemented 50 regional websites, encouraged readers to subscribe to their free ISP, and are now prospecting for equity stakes in potential content providers.
Overall, an investment in Johnston is dependent on your view of the Internet, the threat it will have for local papers and how Johnston can react to the new medium. Of course, Johnston is bullish on its own prospects, believing that the company is "strongly placed to resist any threat which these new (Internet) developments may pose to our traditional publishing activities." If Johnston can manage to establish an advertising grip in the online world as it has done in its traditional business, then the future is bright.
But if advertisers quickly migrate from Johnston papers to faster-moving and more established online rivals, then Johnston shareholders could quickly end up with a company that will undergo an acquisition strategy just to maintain its profits, rather than in the pursuit of profit growth.
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Related Links
• Southnews -- Qualiport Material?
• Old Media in a Brave New World