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Are newspapers a good investment?

Dean Baquet

Former editor, Los Angeles Times

Dean Baquet

But you'd like to be profitable?

Sure, because if the paper's profitable, I can have more foreign bureaus; I can have more national bureaus; and I can have more investigative reporters. Sure. I don't think there's anything wrong with being profitable as an institution; I just mean, for me, as the editor of the paper, profitability is not my first goal.

How much profit do you need to make, do you think? You're not a novice in this business. ... How much profit should a newspaper make so you can have those foreign bureaus and keep the doors open?

I don't know. I can't put a number on it, and [not] just because I think it depends on the newspaper. You've got to be profitable enough to weather financial crises. You've got to be profitable enough so that if you run into a three-year recession you don't have to shrink the news wall and shrink the staff. You've got to be profitable enough so that if five of your biggest advertisers go in the tank, you don't have to suddenly pull back from your coverage of the Middle East, ... profitable enough to cover the world with comfort and not have to pull back when a big story breaks. ...

If you had asked me would I prefer an owner who wanted a modest profit margin because he or she believed in the public service mission of newspapers, I think that would be fine. That would be terrific. That would be preferable to being a publicly traded company that has to go back and forth to the whims of the market. ...

Charles Bobrinskoy

Vice chairman, Ariel Capital Management

Charles Bobrinskoy

A stock analyst said newspapers are a good business but terrible investment.

Good investing is all about investing in good businesses, so we believe that the newspaper business can be, properly run, a very, very good business. There are still huge barriers to entry in most markets. Most markets are now just one-newspaper markets, where there used to be 20 years ago two- or three-newspaper markets. That gives people a monopoly, and that's a very powerful position to be in.

[Berkshire Hathaway chairman and billionaire investor] Warren Buffett disagrees.

Warren -- first of all, the newspaper industry is the industry in which he probably made the most money. His investment in The Washington Post was probably his best investment ever, for all the reasons that I'm talking about -- the very strong cash flows, the high barriers to entry. Very hard for somebody else to start a new newspaper.

He has lately felt that the decline in circulation is going to make this a much tougher business going forward. We at Ariel respectfully disagree. We think that the market already understands all of the challenges that these companies have from a circulation point of view. There's no other business that's more maligned in the press. Everybody talks about how tough the newspaper business is. We think that's already reflected in the stocks, and in fact, the stocks have been oversold. One of the pieces of evidence we use for that position is the fact that we think that private equity firms, who are very cold-blooded about this kind of decision, are coming to look at the newspaper industry as a great business where they can make very good returns because the cash flows are so strong.

Mr. Buffett, with all due respect, says this is an industry where there are too many competitors -- says the same about broadcast television -- and its trend line is to zero.

A couple things. One, Warren would tell you he's not in any way an expert on the Internet, and one of the things he's underestimating is the growth of the interactive and Internet traffic at many of these newspapers. Tribune and McClatchy [Company] both have growth in their Internet properties of 25 to 35 percent. We think that McClatchy will have half of its revenues coming from the Internet within five to six years.

The second thing he's underestimating, we think, is the innovative skills of this industry. This industry started as newspapers. When radio came along the Tribune formed WGN Radio. Then when TV came along they formed WGN TV. When the Internet came along, they were one of the first investors in AOL. They turned a $7 million investment in AOL into over $1 billion. These are people who understand how to take advantage of new media.

A lot of people don't know this: The Internet site that has the most help-wanted ads, most people think it's Monster; it's actually, which is owned by the Tribune, McClatchy and Gannett. So they are doing a great job of getting their product onto the Internet, and we think the market is underestimating that.

Warren Buffett again -- [he says] it's been interesting to watch newspaper owners and investors resist seeing what's going on right in front of them.

Of all the industries that we invest in, there's no industry that's more out of favor right now than the newspaper industry. No doubt about it. That's what we do at Ariel is we try to be contrarian and buy when others are selling. And there's no doubt about it -- people are selling newspapers right now.

Buying low because you think it's going to go back up.

That's right. We know the stocks are trading at the lowest multiples of earnings and cash flow that they have in the last 20 years. Just today the Dow Jones company announced that it had sold six newspapers for 11.5 times operating cash flow. The average newspaper today is trading, as a stock, at about 7.5 times cash flow. So when they went to sell these newspapers, they got real buyers writing real checks for over 11 times, and yet the stocks are trading at 7.5, 8. So we think there are real buyers. Again, private equity firms are going to pay good prices for these companies. The business is not nearly as bad as many people think.

John Carroll

Former editor, Los Angeles Times

John Carroll

You said [newspapers] make barrels of money, ... but then investors aren't happy?

Yeah. Let me illustrate. ... A typical newspaper makes a 20 percent operating margin. That's roughly double what the typical Fortune 500 company makes. They're very profitable. ... This is true at the Los Angeles Times; it's true at the Baltimore Sun, where I used to be editor; it's true at the Lexington Herald-Leader in Kentucky, which is a money-making machine. People think of this as a washed-up old business. It's not.

It makes tons of money. But the owners are under great pressure to increase earning. Newspapers are not growing very fast. ... Even when they make lots and lots and lots of profit, you've got to make lots plus a certain percentage every year, and that percentage isn't very good. That's the problem, as far as it being a publicly traded stock. …

All three papers I've been editor of, particularly the Los Angeles Times and the Baltimore Sun, are achieving [a 20 percent] profit target. ... But they're achieving their profit targets only by cutting resources every year, getting rid of reporters, giving the readers fewer pages of news in the paper. You don't have to be a mathematician to know where that goes. It ultimately, if you project it out, leads to no content, zero content, and then what do you have to sell? So that's a problem. ...

So what's the rationale behind that? Why do you have to cut costs when you are making hundreds of millions of dollars?

Because you have to make more money every year than you made the last year in order to keep the shareholders happy. And so even if you made barrels full of money one year, you've got to make more than that the next year. ...

I think that newspapers could operate at a 10 percent average operating margin very, very robustly for the indefinite future. It would give them a better product, and it would give them money to invest in their future, which is a Web-based future. Right now they're not investing very much. The owners are treating them as if they're doomed and they want to get as much money out of them as they can now, and that is clouding their future. That is sacrificing the future for the present. ...

Lauren Rich Fine

Managing director, Merrill Lynch

Lauren Rich Fine

The general knock on newspapers these days as an industry is that they're dinosaurs; they're going to disappear. The Internet has come along, and the last investment you would want to make is putting your money in newspaper stock.

I don't know if it's the last investment. It's a business that I happen to feel very passionate about what it stands for, and I suspect it will still be a good business going forward, but I wouldn't want to own stocks, that's correct. There's a difference between a good investment and a good business. Typically when you invest in a stock of a company, you invest because you think it's either undervalued or you think the company's going to grow and the stock will grow with it.

Newspapers are not a growth business. The industry is under enormous financial pressure, and so to invest in these stocks with a very, very uncertain future is a challenge, and the advice that we've given our clients is to stay on the sidelines until we can figure out what the growth rate is, if there's a growth rate. But until then, you really don't need to own the stocks.

Giving that kind of advice, isn't that sort of putting the nail in the coffin for newspapers?

No. The funny thing is that, despite all the negative rhetoric, newspapers today are still very profitable. ... They still have margins that are more attractive than if you were to pick the average of the S&P 500 companies. ... What's become a challenge is trying to figure out that growth rate. I think they can possibly grow over time. Cynically I suspect they won't, but I think they can still be profitable. ...

So a paper like the Los Angeles Times, for instance, makes, we are told, about [a] 20 percent margin of profit; in other words, very roughly, a billion dollars in revenue a year, $200 million they can take away. ... Why wouldn't I invest in companies like that?

Well, first of all, the sense is that the Los Angeles media market is a really challenging one, ... because you've got a tremendous number of TV station outlets, networks that serve that market. Local cable ad sales are encroaching on newspapers. Radio stations are even more competitive because their industry is under the same pressure. ...

You invest at 200 because you think it's going to 250; the fear today is 200 can go to 150, and that's your fear as an investor. Newspapers generally, at one point at their peak, they were generating close to 70 percent of their pretax profits from their classified advertising: help wanted, real estate and auto. Today a good portion of help-wanted classified has gone online, a lot of it with newspapers. ... Real estate is going online; auto is going online. ...

David Hiller

Publisher, Los Angeles Times

David Hiller

Yeah. On that one, we haven't said or planned or decided any number of buyouts or layoffs for next year. Let me address your bigger question. The issue for the whole newspaper industry -- not just the Los Angeles Times -- is, what's the financial trajectory of the business over time? At the present time, here in Los Angeles, we have a lot of revenue, and there is a lot of cash flow, but the question is, is it getting bigger, or is it getting smaller? That's plainly the concern that the investors have and why Wall Street is being so harsh on newspaper companies at the present time.

Your stock?

Our stock. But all -- Knight Ridder's stock until they were sold, New York Times stock, today, [McClatchy's stock]. The question is not about how you are doing today; the question is, how are you going to be doing in the future? …

[Is it] because of the stock price that these layoffs took place?

No. The stock price is a reflection of what the markets think about the future prospects of the business. So the stock price is saying that we don't think the newspapers are growing or that we don't think the newspapers are adapting to the Internet or that we don't think the newspapers are doing the right thing to attract more readers. You don't change the stock price directly. What we've got to change is how are we doing as newspapers in attracting more readers, in doing more on the Web, and so that we do have the growth that somebody, whether it's Wall Street or anybody, is going to recognize and reward us for. …

Larry Kramer

Former head, CBS Digital Media

Larry Kramer

Right, and even if they are interested in the family legacy, there's an increasing pressure to make more money, because the public markets are drawn into a lot of these things, even though they're privately run; they're run for stockholders. Whenever you open something up to the public and you bring in a public stockholder, you have to worry about their needs, not just your own. ...

Now, no one can sit here today and tell you what the appropriate level of profit is. ... When the economic model gets shattered, you've got to worry about it. You just have to worry about, what do we have to do to stay viable? And it isn't only about profits today. It's about having the economic viability to weather storms in the future, because you don't want to be in a desperate situation. You don't want to be in a situation where it starts going heavily into losses before you can do anything about it, because then ... you have no control over the decisions you make. You just have to make ugly, brutal decisions.

So I don't ascribe the same concern to somebody saying, "We've got to downsize, because here's the economic reality." I mean, I think that's true. My goal, though, would be, as a publisher and as a journalist, to build revenue sources up that allow you to keep a first-class news organization. Increasingly that means you've got to do things other than just print a newspaper.

Well, The Washington Post has Kaplan, [Inc.].

No, no, I mean within news itself. The Washington Post built aggressively, is building an online business, which increasingly is part of its business. Not only is it increasingly an economic portion, but almost as many people in Washington now read The Washington Post on the Web as read it in print. In fact, it might be higher in Washington. It's close. Think about that. We've only had, what, 10 years of the Internet on The Washington Post, and in 10 years they built an audience even within the boundaries of Washington itself of as many people who read it in the print read it on the Web.

But the same thing is true of The New York Times; the same is true of the Los Angeles Times. More people read the Los Angeles Times online than buy it, right? I'm just asking you the newsroom question that we got, the question that John Carroll raised with us and others. We're making over 20 percent profit. ... We give you your 13 Pulitzer Prizes. You look great, you love that, and you're telling us to cut, and every year you're telling us to cut more, and you're cutting to bone. Their complaint, the publisher who got fired, [Jeff Johnson], his complaint was you can't cut your way to success.

I agree. There is a point where that's true. Now, I'm not as familiar with the internal workings of the L.A. Times, but my instinct is that he totally believed that and the editor believed that, and they're the two closest people to it. So as a corporate entity, you have to either back your guys or think you know more about the situation. ...

The company is for sale. I mean, what does that tell you? If the shareholders think the company should be sold, it says the management isn't running the company the way it should, isn't doing what it should with this company, and the shareholders aren't happy about the fact that the best and the brightest people in the company are quitting because they think that the moves that top management's making are damaging.

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posted feb. 13, 2007; last updated feb. 27, 2007

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