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Six months can be a long time on the stock market. Hark back to the Spring and "investing" was a completely different ball game. I mean, shares were going up! "Dotcom fever" had broken out and if you weren't fully invested in "new economy" stocks, well, you were nowhere...
However, times have changed. The investment gloss has truly worn off the Internet startup. These days, the shareholder maxim reads "burn is out, cash is in". And "B2C" apparently now refers to dotcom employees going "back to consulting".
As investors become far more selective with their online venture funding, the present situation looks to be good news for the "traditional" media company. In short, the existing sector players will have fewer competitors, and will perhaps require less money, to establish a sizeable Internet presence.
(On this point, it will be interesting to review the forthcoming interim results of Qualiport constituent Emap (LSE: EMA). Having announced a bold online spending plan at the peak of the tech boom, will there be a subsequent (and welcome) cutback by the magazine publisher?)
So, with the dramatic about turn in the financial fortunes of Internet businesses, it could pay to revisit certain companies previously put to one side as possible Qualiport candidates.
Read all about it!
In January, I reviewed Southnews (LSE: SNW), the local newspaper publisher. Here's the summary from that feature:
"The thought of classified advertisers turning their back on newspapers, and moving to a new electronic medium, is a significant danger. With this in mind, have local newspapers seen their best days? Or will they survive the Internet, as they have with radio and television, and keep their inherent advantages?"
"I've no doubt, even after this quick review, that Southnews clears the business and financial criteria for the Qualiport. But that's the past. My doubt stems from the way forward... I feel at this initial stage, (Southnews are) a definite "maybe" and one to reflect upon further."
Although I found the historic financial performance of Southnews very attractive, I may have overplayed the Internet threat to local newspapers. However, the thought of classified advertisers deserting the local rag for an electronic medium does still survive. But unless the online competitors for a paper's advertising revenue are already up and running, the current financial climate will make it very difficult for any more cash-hungry startups to get going.
Online opportunities
Increasingly, I view the Internet as a "broadly neutral" factor for newspapers. Offsetting the online competition is the simple fact that newspapers have all the revenues at the moment and are creating their own online presence, should their customers wish to go digital.
A few examples of the industry's e-developments:
"During the year, Southnews has continued to invest in electronic publishing both at the general level of setting up newspaper sites on the web and at a more closely focussed level of providing web support for specific customer markets" -- Southnews annual results, May 2000.
"The Company... has 54 web sites from Scotland to the South Coast of England. Page impressions are running at over 3 million per month and are expected to rise strongly. The sites are all locally branded, building on the market strength of its local newspapers, and provide extensive content to the local communities they serve. During the period, a number of important developments have taken place including the launch of Johnston Press branded on-line classified search services." -- Johnston Press (LSE: JPR) annual results, August 2000.
"The Group's electronic publishing businesses are making good progress, with monthly page impressions for the Group's consumer web sites now exceeding 50 million. The Group's consumer sites are benefiting from increased promotion in our own titles and cross-divisional co-operation." -- Daily Mail & General Trust (LSE: DMGT) trading update, September 2000.
Acquisitions and low growth
In the past, I've also levied another charge against investing in the newspaper industry -- that of low organic sales growth leading to a consolidation and acquisition industry. In my book, there's no growth like organic growth. However, investors are nearly always asked to pay dearly for those companies exhibiting significant organic prospects.
As an alternative, investors can look for well-run "second-tier" companies. These businesses have medium to low growth prospects, yet combined with attractive financial characteristics and an enticing valuation.
Eagle-eyed Qualiport readers may have spotted this poignant remark from my recent feature on Halma (LSE: HLMA).
"I recognise that some companies that have low growth prospects can still, through acquisitions, re-deploy their capital at attractive rates of return. Newspaper publishers are a good example. A business that has few organic growth prospects, but can manage a superior profit reinvestment return aided by an acquisition strategy, isn't a complete investment write-off."
Indeed, Emap is a good example of this "low growth but high rate of return" type company. All in all, I think a Qualiport re-assessment of the newspaper publishers is in order. As well as Southnews, two other industry players also appear to be on reasonable ratings. At present, Trinity Mirror (LSE: TNI) and Johnston Press stand on prospective price to earnings ratios of 12 and 14 respectively. In the near future, I'll review the company that initially appears the better of the two, Johnston Press.
Where Next?
• Have your say on the Southnews, Johnston Press and Trinity Mirror discussion boards.
• Decide if Southnews is Qualiport material
• Read the views of discussion board regular MarkLucas1 on the future for local newspapers