Newspapers now in the Sweet Spot.

As someone who spend over three decades making a living and building a retirement in the newspaper industry we believe we have some credibility regarding the future of the newspaper industry.  So when we say that we believe newspapers are in the sweet spot economically we should have some cred.  There are some exceptions here we will explain, but for the most part owning a small daily in a small to medium sized town is future wise and profit wise as good as it gets now. 

There is a reason billionaires like Warren Buffet are buying small daily newspapers. Groups such as Halifax, Cooke, Civitas, Boone, and others are active in the market adding dailies to their already good sized portfolios of newspapers.  Also note on the reverse side groups such as McClatchy, Lee, and Gannett are looking for buyers and selling some of their properties in large dailies.  Let's deal with the selling side first. Many of these groups got way over leveraged in debt buying newspapers earlier when returns were high due to the economic environment and buying at a premium price made sense.  Now they are selling those same properties at a net loss to lower the debt load to make management of their remaining properties less burdened by that cost.  Also large dailies in population centers frankly are being hit hard by competition from other media.  Television, radio, other targeted print media, and yes web based advertising is cutting into their business.  With a declining business base and higher legacy cost structure selling large daily newspapers is needed by these chains, but plainly quite hard since most buyers do not want a large circulation daily unless the newspaper is in a city where a wealthy buyer is willing to do it knowing at best they will operate a break even operation while taking some pride in owning the local daily. Pride must have some benefits we guess. 

There was a time when owning a newspaper could net the owner a 25% plus return on their money.  We personally have known newspapers that returned 40% plus in turnover ratio operating in the 1980's.  Those days are gone.  Newspaper owners and newspaper chains took their semi-monopoly status for granted for too long and when the internet hit and the monopolies ended in the early 2000's these owners got hit with the real economic world.  In our opinion owners then did not position their properties to compete well and operate in the real world as many of us kept suggesting and when the real world hit they were hit hard.  Huge debt loads severely hurt many of the chains and McClatchy is the poster boy for that situation. Right before the bottom fell out in the newspaper industry McClatchy took on several billion dollars in debt from the purchase of Knight Ridder. Many of their newspapers were in large metros too and the present ownership of those newspapers by McClatchy is in some cases not a very profitable situation.  Lee had similar issues with some of the late in the cycle newspaper large daily buys. 

Nowadays those large metro dailies continue to suffer nationwide.  One constantly hears other media and even newspapers themselves lament the problems with business in their industry and how the future is not very bright.  Indeed in our opinion it is not very bright.  We personally would not want to own a newspaper with a circulation above 50000 and not sure we would want one above 30000.  The economics do not work and the business competition too intense.  On the other hand like Buffet and the billionaires who own Cooke Communications and Halifax Media we would love to own some of their properties. In our state of North Carolina newspapers in towns such as Jacksonville, Greenville, Concord, and Hickory, just to name a few, look like darn fine newspapers to own.  They exist in medium sized towns where their products are needed and desired.  They operate in markets where competition is not intense. They have employees who are not unionized.  All they need to do is stick to their knitting and business profits will do fine. Most importantly the owners are not over leveraged with debt and can accept 15% to 18% returns on their investments.  Think about that again, 15% to 18% returns,  that sounds pretty good to anyone who understands investing. Let's be honest here, that percentage is what newspapers should have been earning all along too.  Newspaper chains were their own worst enemies taking on high debt with maximum exposure to a downturn in the markets. If they had bought wisely we expect many now would not be as bad off as they are even with some of the poorly operating large metro dailies.  Boone Newspapers looks to us to have been one of the smarter operators keeping to their knitting and buying opportunistic as they came along. 

All this talk about newspapers being in trouble is seeping down into employee issues as well.  Many young people are forgoing excellent employment opportunities and careers in the newspaper field after listening to all this doom and gloom.  We find that the large number of job openings in the small to medium daily field to be a great entry point for long term employment.  Most of these jobs offer good pay with excellent benefits and the pleasure of working with and getting to know local merchants. They also offer the opportunity to be a part of small town life which in most cases is pretty good and cheap living too compared to larger cities.  We highly suggest young people take a look at these jobs. We would if we were younger. 

The operating model we noted earlier for small to medium dailies offers long term ownership benefits and long term employment benefits.  That is to us a true sweet spot for newspapers.  Unfortunately for investors seeking some exposure to this field there are few opportunities.  Lee, symbol LEE, has some promise, but again we have concerns about the debt load.  Warren Buffet owns some of Lee's stock, but has unloaded some recently.  McClatchy, symbol MNI, has for us too high a debt load as well as a list of large city properties we do not like.  Gannett, symbol GCI, has done a good job a cleaning up it's balance sheet and has some good properties and bad properties, but has moved into television more and more in the last year.  So if you have interest do some due diligence and consider. One other company to consider is Media General, not a newspaper company but a former holder of newspaper properties.  They sold off their portfolio to Warren Buffet and now own a nice portfolio of profitable television stations.  Note that Mr. Buffet also owns some debt in this company that he has the option to convert to ownership down the line. 

We have no ownership in any of the securities mentioned here.