Why New York Times Should Be An $8 Stock
Robert Maltbie , Contributor : Forbes
Page one of The New York times features president-elect Donald Trump’s victory, Wednesday, Nov. 9, 2016 in New York. (AP Photo/Mark Lennihan)
The print news industry is on the endangered species list with diminishing cash flow, a natural progression of tech obsolescence.
Like other epic transformations of leadership, we witnessed the Pony Express succumb to Western Union, the mainframe to the personal computer, Sears to Amazon, and now it is printed media to digital. All the legacy players are desperately invoking a cut and digitize strategy with decaying balance sheets, not covering cost of capital, in a slow withering decline.
These are the winds of change. The irony of unintended consequences is, as the New York Times (NYT) strives to increase its digital presence, it finds itself more and more in the realm of news unfit to print, championed by internet startups like BuzzFeed, Huffington Post and others, where they may be alienating their lifeblood, longtime legacy readership in pursuit of a less profitable, fickler, less interested millennial-oriented readership on a digital platform.
The industry is currently faced with huge challenges. Revenue from print has fallen, and marketing budgets have been increasing. Per MGroup, digital market share will reach 33%. Digital will get $0.77 cents for every new ad dollar compared to $0.72 cents in 2016. Unfortunately for the New York Times and other media companies, most of these revenues will go to the Google and Facebook duopoly.
Examining the company’s internal operations, a chronically poor return on equity and return on assets demonstrating management’s lack of deftness in a very difficult environment. The stock price has tanked despite increased borrowing to fuel growth.
Poor capital allocation decisions like share buybacks have destroyed capital and key financial ratios over the past six years exhibit deterioration. Operating profit to revenues have been on a downtrend, return on average common stockholders’ equity has been slipping, return on average total assets is declining, total debt and capital lease obligations to total capitalization increased, and the ratio of earnings to fixed charges is declining These key financial metrics point to an increasing indebtedness of New York Times (NYT) to make matters worse.
New York Times’ high legacy operating cost, pension deficit and high debt, will prevent it from engaging in an aggressive acquisition campaign to grow the digital business, and it has created significant risk to earnings from pension plan obligations. The unfunded amount must be charged against earnings on an amortized schedule over 10 years and, creating another $40 million to $60 million drag on EPS. Including interest expenses and lease expenses, these costs total about $160 million, which offset all earnings for the company’s common stock annually.
New York Times’ stock, with no growth will be fortunate to trade at a market average of 18 times earnings, giving it a fair value of $8.
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