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Publishing Industry Outlook - October 2017

Zacks Equity Research
Publishing Industry Outlook - October 2017

Is Diversification the New Mantra?

The U.S. newspaper publishing industry has long been grappling with sinking advertising revenues, and the global economic slowdown has only worsened the situation. The downturn in the newspaper publishing industry witnessed over the last few years was aggravated by a decline in print readership. More and more readers started opting for online news, thereby making the print-advertising model increasingly irrelevant.

Changing consumer preferences and the advent of new and innovative technologies have been altering the way news is offered and read. Readers now have myriad choices when it comes to collecting and reading articles or news through devices such as netbooks, tablets or other hand-held devices. Advertisers are now tapping the online video boom to reach their audience.

These factors have been weighing on the print industry, as advertisers now get low-cost avenues to reach their target audience more effectively. We believe that an alternative and stable source of revenues is needed to salvage the dwindling print newspaper industry. To deal with the situation, newspaper companies are trimming their operations, resorting to restructuring, revamping their print editions and investing in digital initiatives.

Declining Newspaper Advertising Revenues

Advertising remains a significant source of revenues for the industry that in turn depends on the health of the economy. Macroeconomic factors such as sluggishness in business spending, high unemployment and falling home sales may affect the level of national, retail and classified advertising revenues, as advertisers cut their budget in response to soft economic conditions.

Advertising volumes remain under pressure as advertisers still deter from making any upfront commitment in an economy under recovery. The McClatchy Company (MNI) witnessed a 15.6% drop in print advertising revenues during the second quarter of 2017, preceded by a decline of 17% in the first quarter. Print advertising revenues fell 10.5% in the second quarter, following a decline of 17.9% in the preceding quarter at The New York Times Company (NYT). At Gannett Co., Inc. (GCI), print advertising and circulation revenues declined 16.8% and 7.4%, respectively, on a same-store basis.

Newspaper Companies Keeping Up Changing Trends

Newspaper companies have now been remodeling and restructuring themselves to better align with the growing need of marketers, targeting younger people, affluent households and other demographic groups with multiple web and print publications. Publishing companies are adapting to the changing face of the multi-platform media universe, which currently includes Internet, mobile, tablet, social media networks and outdoor video advertising in its portfolio.

McClatchy launched a new digital advertising agency, ‘excellerate,’ to provide marketing solutions to local and regional advertising clients. The company’s digital-only advertising revenues surged 10% in the second quarter of 2017, while total digital advertising revenue fell a marginal 0.9% from the year-ago period. The New York Times Company’s digital advertising revenues jumped 22.5%, while New Media Investment Group Inc.’s (NEWM) digital revenues increased 9% during the second quarter.

Publishing companies have been disciplined buyers of local media assets. New Media Investment Group has been continuously looking for strategic buyouts. The company concluded the acquisition of Harris Enterprises, Inc. in November 2016 and also completed the buyout of the Ohio publishing division of Wooster Republican Printing Company in January 2017.

The company recently entered into an agreement to buy many of the newspapers and related assets from Morris Publishing Group for $120 million and also teamed up withonline employment marketplace, ZipRecruiter, which is now the exclusive provider of recruitment advertising to all its print and online newspaper pages.

Is the Industry on a Value-Oriented Path?

The publishing industry has performed almost in line with the broader market over the past year. In the said time frame, the industry has gained approximately 18.4%, while the S&P 500 advanced 18.6%.

Looking at the industry’s trailing 12-month price-to-earnings (P/E) ratio, it looks overvalued, when compared with the S&P 500. The industry has a trailing 12-month P/E ratio of 20.97, which is above its median level of 16.30 but in line with the high level scaled in the past year. This compares unfavorably with the market at large, as the trailing 12-month P/E for the S&P 500 is at 20.72.

In terms of forward P/E ratio, the industry again looks overvalued when compared with its trailing 12-month P/E ratio and the S&P 500.The industry has a forward P/E ratio of 21.62, which is above its median level of 17.17 but in line with the high level scaled in the past year. This compares unfavorably with the market at large, as the forward P/E for the S&P 500 is at 18.60. Thus, there seems to be little or no room for an upside.

Zacks Industry Rank

Within the Zacks Industry classification, Publishing forms part of the Consumer Staples sector, one of the 16 Zacks sectors, though the media industry is part of the Consumer Discretionary sector. The broader Consumer Staples sector is currently placed at top 19% of the Zacks Classified sectors (3 out of 16) but Publishing occupies the bottom 3% (248 out of 256) position.

We put our industries into two groups: the top half (i.e. industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank). Over the last 10 years, using a one week rebalance, the top half beat the bottom half by a factor of more than 2 to 1. We rank all the 250-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. Click here to know more: About Zacks Industry Rank.

Earnings Trends

As per our ‘Earnings Preview’ report, thebroader Consumer Staples sector portrays a moderate picture. In the third quarter of 2017, total earnings for the sector are expected to climb 1.7%, while total revenue is expected to be up 2.2% year over year.For 2017, total earnings are expected to rise 2.9%, whereas total revenue is likely to decline 6.3%.

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New York Times Company (The) (NYT) : Free Stock Analysis Report
 
New Media Investment Group Inc. (NEWM) : Free Stock Analysis Report
 
McClatchy Company (The) (MNI) : Free Stock Analysis Report
 
Gannett Co., Inc. (GCI) : Free Stock Analysis Report
 
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