Johnston Press, Warren Buffett and the decline of the newspaper industry
Posted on April 9, 2008 by Richard Beddard
Filed Under Companies, Investing |
I’m back from two weeks in Italy, mindful of the fact that I wrote an iBall episode on Johnston Press (JPR) before I left, and eager to say more about the company here. I’m not sure that my Italian experience has provided any insights though, as their approach to news makes our most sensationalist glamour rags look pedestrian, and Johnston Press, one of the nation’s leading local news publishers, is at the other end of the scale.
It was someone even less glamorous that Johnston Press, Warren Buffett, the folksy investor and richest man in the world who was on my mind before I left. Berkshire Hathaway, the investment vehicle he chairs, has owned the Buffalo News for decades, and for many of those years Mr Buffett said newspapers were great businesses because readers had few other sources of local news, and advertisers had few other ways or reaching them.
In his Chairman’s letter, 1984, Buffett explained:
The economics of a dominant newspaper are excellent, among the very best in the business world. Owners, naturally, would like to believe that their wonderful profitability is achieved only because they unfailingly turn out a wonderful product. That comfortable theory wilts before an uncomfortable fact. While first-class newspapers make excellent profits, the profits of third-rate papers are as good or better - as long as either class of paper is dominant within its community. Of course, product quality may have been crucial to the paper in achieving dominance…
Once dominant, the newspaper itself, not the marketplace, determines just how good or how bad the paper will be. Good or bad, it will prosper. That is not true of most businesses: inferior quality generally produces inferior economics. But even a poor newspaper is a bargain to most citizens simply because of its “bulletin board” value.
By 1991 he’d noticed that the dominance of newspapers was shrinking and in his 2006 letter, Mr Buffett described the crumbling economics of the industry:
Now… almost all newspaper owners realize that they are constantly losing ground in the battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed…
…True, we have the leading online news operation in Buffalo, and it will continue to attract more viewers and ads. However, the economic potential of a newspaper internet site – given the many alternative sources of information and entertainment that are free and only a click away – is at best a small fraction of that existing in the past for a print newspaper facing no competition…
…There’s no rule that says a newspaper’s revenues can’t fall below its expenses and that losses can’t mushroom. Fixed costs are high in the newspaper business, and that’s bad news when unit volume heads south…
He’s not giving up on Buffalo News though, partly because he doesn’t like selling even sub-par businesses so long as they still make money, partly because he loves newspapers, reading them and owning the local paper, and partly because he believes some combination of internet and print will develop into a sustainable business model, but, he says:
…The days of lush profits from our newspaper are over.
Which leads me back to Johnston Press and the proliferation of free sheets, directories, internet sites, radio stations and so-on competing with its papers to sell advertising. There’s no doubt JPR is facing similar pressures to the Buffalo News. In its results, it’s even stopped calling itself a newspaper publisher:
Whilst we envisage local and regional newspapers remaining at the heart of our activities for an indefinite period, our mission statement is quite deliberate in making no mention of specific media channels…
…Although our efforts to create wider “communities of interest” remain at an embryonic stage, the growth of our digital channels has opened up the potential to develop new revenue streams based on the creation of new communities bound by a common interest but dispersed across an extended geographic footprint.
As local papers are no longer a license to print money, earnings have stalled at JPR, and nobody knows what form profitable local media will take in the future, it’s hardly surprising investors are willing to pay less for its shares than they were. What is surprising is how much less they’re willing to pay. Since the highs of 2004 and 2005 the shares have fallen from over £5 a share to around £1.40, their lowest levels in more than a decade.
JPR is trading on just over four times its average earnings over the last nine years, and less than four times this year’s earnings. Analysts are forecasting lower profits in 2008 but even the forward pe ratio is below five, less than the 7% dividend yield - covered four times. That’s a lot of figures, but if the estimates are right (and that’s a big if, of course, especially if the anticipated recession happens), it all means Johnston Press is outrageously cheap.
Struggling companies at knock-down prices aren’t for everyone though, so which businesses today are building an indomitable market position like the newspapers of old? Buffett continues his 2006 letter:
…As the importance of newspapers diminishes, moreover, the “psychic” value of possessing one will wane, whereas owning a sports franchise will likely retain its cachet…
Which goes some way to explaining American (And Thai) interest in teams like Arsenal, Liverpool and Manchester United. And it’s a starting point, at least, for an exploration of another style of investing, buying great companies at reasonable prices.
Footnotes:
- I’m not the only one learning from the history of the newspaper industry. The Inventor of the Netscape Browser and internet pioneer Marc Andreessen is studying the newspaper pioneers, to see if they have any lessons for him.
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