By Ryan Fuhrmann, CFA
Wondering why publisher Dow Jones(NYSE: DJ) recently bounced off its lows for the year? Credit the press release management issued on Friday, stating that advertising revenue at its flagship publication, The Wall Street Journal, increased 10.1% for the month of May. Better yet, the release revealed that Dow Jones expects to meet analysts’ expectations and its own guidance with second-quarter earnings in the “low-to-mid 30-cents-per-share range,” before a minor restructuring charge. After years of fading fortunes, is the publisher finally back on an upswing?
I sure hope so. There’s little else to be happy about regarding Dow Jones and the rest of the publishing industry — unless you happen to live in the past. Dow Jones’ shares had a good run until 2000, but they’ve since fallen more than 50%, to a recent $35.21. The publisher’s growth has been woeful over the past decade, with revenue shrinking 2.5% on average per year and earnings dropping about 10% per year over that time frame.
Why the weakness? Nearly half of the company’s sales stem from newsprint, which is experiencing a steadily shrinking subscriber base and subsequently lower advertising sales. In addition, advertising sales are cyclical, since they’re one of the first expenditures cut by firms during economic downturns. The bad news doesn’t stop there: Profit margins are low, debt is high, and strong operating cash flow has been devoured by capital expenditures and business acquisitions, as management tries to reposition its business model toward faster-growing online initiatives.
This is beginning to sound like a value trap — but before we write Dow Jones off, let’s try to hunt for some positives. The current dividend yield of 2.9% offers some consolation, since we’re getting paid to wait for a turnaround. In addition, the company has an impressive array of publications that any Fool worth his or her salt should be reading regularly, including TheWall Street Journal, Barron’s, and MarketWatch. The company’s namesake Dow Jones Industrial Average further bolsters its brand, along with several other related indices and information-service offerings.
Dow Jones’ website states that this combination of assets creates a virtuous cycle of journalistic excellence and business and financial success. Sounds good, but investors have been stuck in a vicious cycle for nearly six years, and there appears to be no end in sight.
Charlie Munger and Warren Buffett offered their thoughts on newspapers and media at May’s annual Berkshire Hathaway(NYSE: BRK-A) meeting in Omaha. Fellow Fool Rick Casterline provided the full transcript, but to summarize, Mr. Buffett pointed out that today there are just too many distribution channels to deliver news, including television, the Internet, and mobile devices. Too much competition is clearly a negative for firms operating in the space, Buffett said. He couldn’t pinpoint an appropriate multiple to pay for shrinking publishing companies, but suggested that today’s multiples are too high. That’s little consolation for current investors, and it’s likely to keep potential future investors on the sidelines.
The above applies to Dow Jones, but it can be easily applied to competitors with similar business models, including Gannett(NYSE: GCI), Knight Ridder(NYSE: KRI), New York Times(NYSE: NYT), or Tribune Company(NYSE: TRB). All in all, investing in the publishing industry looks like a bona fide value trap. Fools are probably better served by gleaning profitable investment opportunities from these publications, rather than investing directly in their underlying companies.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.