A cyclical downturn and a belief that newspapers are in an inevitable decline are throwing up some cheap shares.
Newspapers are disappearing. Readers are getting their news from the Internet and advertisers are following them. The last newspaper will be printed in 2034. That's what some people think anyway.
As this has become the received wisdom, the share prices of newspaper companies have been pushed lower and lower. Naturally, this means that it is time for contrarian investors to take a good look at the sector.
Last week when I was planning a piece on media, I didn't expect one of the most influential publications, the Economist, to have a special report on the dangers facing the newspaper industry. Nor did I expect the Sunday Times to respond to it in a leader. So I dropped the idea of doing "media" and decided to concentrate on newspapers and to ask what it all means for investors.
It's important to note that most of the negative comment about newspapers refers to the situation in the US. In the US, many towns are one newspaper towns. That one newspaper has, until recently, been the only way for local businesses to communicate with the local area. Classified advertisements in these newspapers have been "rivers of gold" (in Rupert Murdoch's words). It's for this reason that Warren Buffett used to wax lyrical on the benefits of owning a newspaper - he still holds shares in the Washington Post
(NYSE: WPO)
.
For many such newspapers there is a real danger, because much of that invaluable classifieds business is being taken away by the likes of craigslist and Ebay
(NASDAQ: EBAY)
.
The UK is, however, different.
Readership of British national newspapers has been declining for many years, since well before the Internet became popular. This is why I've always avoided groups that publish national newspapers, in particular this means Trinity Mirror
(LSE: TNI)
, which owns the Mirror newspaper.
Yet, just as these circulation declines were assumed to be continuing, some of the broadsheets re-jigged themselves into tabloids and have reversed the trend.
What's more, after many years of grappling to find out how to adapt their businesses to the Internet, almost every newspaper now has a sensible new media strategy.
Also there is a fundamental truth about our economy that makes newspapers important -- that mass production needs mass media to sell products and create brands. This was put best by Anthony O'Reilly, Chief Executive of Independent News & Media
(LSE: INM)
, who said in the company's 2005 Annual Report:
"[...] because of the multiplication of devices, particularly devices which concentrated on the individual and the individual's needs at a given point in time, the aggregation of large audiences has become not less difficult, but much more difficult. It is in these circumstances that television, newspapers, magazines and, to a degree, radio remain the best and indeed the only way for mass audiences for goods and, to a certain extent, services to be created."
So as an investor, I wouldn't worry about the "gloom" which is based on macro-trends and crystal ball gazing.
Although there is a a cyclical decline in advertising revenues, newspaper publishers look cheap on their financial ratios. Johnston Press
(LSE: JPR)
, the publisher of the Scotsman amongst other things, has a p/e of 10, as does Trinity Mirror. Independent News & Media is on a p/e of 13, which reflects the fact that they are less susceptible to the downturn in the UK thanks to their international operations. Daily Mail & General Trust
(LSE: DMGT)
looks more expensive on a p/e of 12.6.
The gloom over the industry is likely to go on for some time, so it's not essential to buy straight away, but in the next few months, I'll be adding more newspaper shares to my portfolio.
Paul owns shares in Johnston Press
