The media business has taken it on the chin in the past five years. Only recently have we seen signs of recovery. The 15 stocks covered by Tickerspy in its newspaper and magazine index are up an average of 264.7% in the past 52-weeks with performance coming from all market caps, not just smaller stocks. While it's been nice to see, it's important to remember that as a group they fell 21.3% annually over the past three years. Back from the brink, can they keep going for an extended period? Here are four ways to play this space.
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Large Cap - Reed Elsevier Plc (NYSE:RUK)
Out of 15 stocks, this is the only large cap in the bunch. The business itself is extremely stable and has held up reasonably well during the global recession. Its four business segments generated $9.8 billion in revenue in 2009 with three-quarters coming from its Elsevier scientific and health sciences journals as well as LexisNexis, an information provider for legal and risk management businesses. The two divisions accounted for 86% of its adjusted operating profit from continuing operations.
While headquartered in Europe, 55% of the company's overall revenue is in North America. Once the economy recovers, it'll be interesting to see if RUK seeks greater global balance. This company has a good yield of 5.5% and is currently trading 41% off its five-year high, making it an attractive long-term play.
Mid Cap - Gannett (NYSE:GCI)
Barron's makes a compelling case why I should pick the Washington Post (NYSE:WPO) over Gannett. It feels that the true value of the entire company is $8.5 billion, not the $4.2 billion in market value, calling Washington Post stock "dirt cheap." We'll see about that.
However, Gannett historically has a better profit picture than the Post. If you look at the average operating margin for both companies over the past five years (excluding the best and worst years), Gannett's are double those at the Post - 20% to 9%. Recession or not, Gannett makes more money from every dollar of revenue it generates.
If earnings truly drive stock prices, Gannett deserves a higher valuation multiple. The Post's stock is trading at 11.3 times free cash flow to 5.1 times for Gannett. If Barron's is right and the Post's stock is worth twice its current value, logic dictates Gannett's is also.
Small Cap - Dolan Media (NYSE:DM)
Lawyers might be familiar with Dolan on a couple of fronts. First, it publishes Lawyers Weekly in Boston and second it provides business-processing outsourcing (BPO) services to the legal profession. In 2009, its outsourcing business accounted for 65% of its revenues with the remainder from publishing. Because of this revenue shift, the company will change its name to The Dolan Company.
Frankly, it can call itself whatever it likes as long as it continues to grow profitably. Last year revenues increased $73 million, or 38%, to $263 million and net income increased of 36% to $34.6 million from $16.6 million. Given an enterprise value 6.1 times EBITDA and a forward P/E of 8, Dolan is the dirt-cheap stock. (Learn more about enterprise value in Value Investing Using The Enterprise Multiple.)
Micro Cap - Media General (NYSE:MEG)
The media choices under $300 million are a dog's breakfast. I'm not sure I'd choose any of them but I'll go with Media General, a Richmond-based owner of television stations, daily and weekly newspapers as well as some digital media properties.
It did manage to make $27.4 million in the fourth quarter against a 14% decline in revenue to $177 million. However, most of this profit came from a 22% reduction in operating costs, which included job furloughs.
What is interesting about Media General is 4.3% of its shares are held by the Chou Associates Fund, a Toronto-based value investor that's beaten the S&P 500 by 12.5% annually over the last 10 years. They understand value and that's good enough for me.
The Bottom Line
As media continues to evolve, one constant remains and that is the need for information. These four picks all have an opportunity to benefit from this need. Now all they have to do is execute a good plan - not a great one - flawlessly.
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