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Publishing Industry Stock Outlook - February 2018

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Steadily declining advertising revenues and print readership have emerged as enduring features of the U.S. newspaper publishing industry. Readers’ preference for accessing news online, mostly free, has made the industry’s print-advertising model increasingly irrelevant.

Changing consumer preferences and new technologies have altered the way news is offered and consumed. 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 thus tapping the online video boom to reach their audience.

This has forced the newspaper publishing companies to diversify their revenue base, trim their operations, revamp their print editions and make their digital offerings more compelling. These appear inevitable in the wake of declining print advertising revenues.

The McClatchy Company (MNI - Free Report) witnessed an 18.7% drop in print advertising revenues during the third quarter of 2017, preceded by a decline of 15.6% in the second quarter. At Gannett Co., Inc. (GCI - Free Report) , print advertising and circulation revenues declined 18.7% and 7.6%, respectively, on a same-store basis.The New York Times Company (NYT - Free Report) print advertising revenues fell 8.4% during the fourth quarter of 2017.

Newspaper Companies Fast Adapting to Changing Dynamics

Newspaper companies have been remodeling and restructuring themselves to better align with the growing need of marketers and 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 digital advertising agency Excellerate to provide marketing solutions to local and regional advertising clients. The company’s digital-only advertising revenues increased 8.2% in the third quarter of 2017. New Media Investment Group Inc.’s (NEWM - Free Report) digital revenues increased 11.1% during the third quarter. At Gannett, digital revenues jumped 3.7% on a same store basis, with growth in areas such as mobile, audience extension, digital marketing services and branded content.

Companies are increasingly relying on the pay-and-read model. The New York Times Companystated that the number of paid digital subscribers reached 2,644,000 at the end of the fourth quarter of 2017 – rising 157,000 sequentially and 41.8% year over year. Revenues from digital-only subscriptions products surged 51.2% during the quarter. Management now projects total subscription revenues in the first quarter of 2018 to increase in mid to high-single digits.

The industry has been witnessing increasing consolidation activity. Publishing companies continue to be disciplined buyers of local media assets.

New Media Investment Group has been continuously looking for strategic buyout targets and partnerships. The company acquired certain newspapers and related assets of 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 print and online newspapers.

New Media Investment Group also acquired a 20% stake in an opt-in text-based platform, TapOnIt. The platform lets consumers receive offers from local businesses directly on their phones. The company has also entered into an alliance with Houzz, a home improvement and interior design site. The collaboration allows New Media readers to gather information on home renovation and design as well as other local real estate content and homes for sale.

Notably, Gannett has been aggressively expanding its digital presence, as evident from its acquisitions of ReachLocal, Golfweek, SweetIQ and Grateful Ventures. This diversified publishing conglomerate,in October 2015, entered into a deal to acquire Journal Media Group, Inc., theowner of the Milwaukee Journal Sentinel and other newspapers. In April 2016, the company completed the acquisition of all of the remaining shares.

Journal Media Group was formed after Journal Communications and E.W. Scripps merged their broadcasting operations and split the newspaper business. The merged broadcast and digital media company, headquartered in Cincinnati, retained the name The E.W. Scripps Company (SSP - Free Report) .

Another newspaper publishing company, The New York Times Company acquired a digital marketing agency and portfolio company, HelloSociety, from Science Inc., which complements the company’s T Brand Studio that helps in creating digital ad innovation and branded content.

Is the Industry on a Value-Oriented Path?

The publishing industry has outperformed the broader market over the past one year. In the said time frame, the industry stocks have gained approximately 32%, while the S&P 500 advanced 14%.

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 23.3X, which is above its median level of 19.3X but in line with the high level scaled in the past year. This compares unfavorably with the market, as the trailing 12-month P/E for the S&P 500 is at 20.2X.

In terms of forward P/E ratio, the industry again looks overvalued relative to its own history as well as relative to the broader market. The industry has a forward P/E ratio of 21.1X, which is above its median level of 19.3X, but below the high level of 23X over the past year. This compares unfavorably with the market at large, as the forward P/E for the S&P 500 is at 17.4X. Thus, the valuation picture is far from attractive.

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 50% of the Zacks Classified sectors (8 out of 16) but publishing industry occupies the bottom 27% (187 out of 256) position.

We put our X 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 modest picture. In the fourth quarter of 2017, total earnings for the sector are expected to climb 8.5%, while total revenue is expected to be up 1.9% year over year.

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