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Publishing Industry Stock Outlook: Digitalization a Catalyst

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The U.S. newspaper publishing industry is constantly evolving, courtesy of rampant technological advancements that have opened up considerable scope through which the industry can reach its target audience. Quite apparent, the industry is no longer restricted to print.

The industry has come a long way from being a sole provider of news content and advertising on print publications. It has seen a rapid increase in digitalization with major sources of revenue generation being advertising, subscriptions and sales, printing services and distribution services, among others.

Changing consumer preferences and innovative technologies have altered the way in which news is offered and consumed. Readers’ preference for accessing news online, mostly free, has made the industry’s print-advertising model increasingly redundant. Now as readers have swamped to the Internet, advertisers followed suit and so did newspaper companies.

Trimmed print operations paved pay for online publications that led to the development of the pay-and-read model.

It goes without saying that the alignment of the print and digital model has not been an overnight phenomenon. This is because the dramatic shift to digitalization demanded simplification of the operating structure by divesting or separating broadcasting and other media operations from the print business.

This shift has prompted many operators to critically evaluate the economic viability of their traditional print operations, with many deciding to exit the print business altogether and focus on the digital format instead. Even iconic brands like Newsweek and Time have not been immune to these shifts, with the former exiting the print format altogether and the latter severely curtailing the print version.  

Attractive Shareholder Returns

The Zacks Publishing - Newspapers Industry within the broader Zacks  Consumer Staples Sector has outperformed both the Zacks S&P 500 Composite and its own sector over the past year. While the stocks in this industry have collectively gained 35.9%, the Zacks S&P 500 Composite advanced 12.5% and Zacks Consumer Staples Sector declined 8%.

Looking at shareholder returns over the past year, it is quite apparent that investors remained quite confident about the industry’s prospects. Definitely, steps such as venturing beyond traditional advertising, strengthening of portfolio via alliances & buyouts, pay-and-read models and focus on data-driven digital marketing services have put the industry on growth trajectory. However, headwinds such as decline in print advertising and difficulties in retail advertising may play spoilsport.

One-Year Price Performance

Publishing - Newspapers Stocks Look Expensive

Owing to the outperformance of the industry over the past year, the valuation looks expensive now. One might get a good sense of the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which is an appropriate multiple for valuing Publishing - Newspapers stocks. 

The industry currently has a trailing 12-month P/E ratio of 23.2X, which is the highest point over the past year, with the one-year median being 20.9X. Clearly, there is limited upside potential.

The space also looks expensive when compared to the market at large, as the trailing 12-month P/E ratio for the S&P 500 is 20X and the median level is 20.2.

As evident from the chart below, the premium to the broader market has started to expand since the beginning of 2018 and is still at an elevated level.

Price-to-Earnings Ratio (TTM)

Outperformance May Continue Due to Solid Earnings Outlook

Focus on realigning cost structure and streamlining operations to increase efficiency and safeguard earnings and cash flows from dwindling print advertising revenues should help Publishing - Newspapers stocks continue delivering shareholder returns over the near term. Moreover, focus on digital business and undertaking of strategic acquisitions should position the company well for growth.

But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. While the earlier valuation analysis reflects that there is little upside left, there are enough reasons for investors to continue to look for a good entry point.

One reliable measure that can help investors understand the industry’s prospects for a solid price performance is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.

The Price & Consensus chart below for the industry shows the market's evolving bottom-up earnings expectations for the industry and its aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.

 Price and Consensus: Zacks Publishing - Newspapers Industry

This becomes clearer when we look at the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.

Please note that the 86-cent 2018 EPS estimate for the industry is not the actual bottom-up dollar EPS estimate for every company in the Zacks Publishing - Newspapers industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the earnings estimate of 86 cents but rather how the estimate has evolved recently.  

 Current Fiscal Year EPS Estimate Revisions

As you can see here, the 86 cents EPS estimate for 2018 is up from 85 cents at the end of May and 70 cents at the end of January. The current EPS estimate also shows a significant improvement from the year-ago estimate of 64 cents.

In other words, the sell-side analysts covering the companies in the Zacks Publishing - Newspapers industry have been steadily raising their estimates.

Zacks Industry Rank Indicates Robust Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term.

The Zacks Publishing - Newspapers industry currently carries a Zacks Industry Rank #106, which places it in the top 41% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Our proprietary Heat Map shows that the industry’s rank has kept to a relatively narrow range over the past six weeks. We note in the said period, the industry’s rank rose to 101 before slipping to 106 last week but is still in the top 50% of the Zacks-ranked industries.

Publishing - Newspapers Space: Earnings & Revenue Trends

The past earnings trend of the Publishing - Newspapers space reveals that although the group has witnessed a steep in decline in 2016, the trend has been quite stable thereafter. Notably, the earnings trend has shown substantial improvement from 2013 to 2015.

Publishing – Newspapers EPS

The top-line performance of the Zacks Publishing - Newspapers industry has been showing growth since 2014.

Publishing – Newspapers Revenues

Bottom Line

Although print remains a requisite, newspaper companies will continue to focus on the digital arena. Analysts believe that digital advertising will gradually take center stage and percentage of revenues from the same is likely to exceed print advertising. Companies may also increasingly rely on paywalls. Moreover, with increasing consolidation, publishing houses will continue to be disciplined buyers of local media assets.

Certainly, newspaper companies will have to remodel and restructure to better align with the growing need of marketers and millennials, affluent households and other demographic groups. Publishing companies are fast adapting to the changing face of the multi-platform media universe, which currently covers Internet, mobile, tablet, social media networks and outdoor video advertising.

Nonetheless, success is dependent on how effectively newspaper companies exploit the growing use of Internet as a medium to reach business-to-business and business-to-consumer markets. Given the significant growth opportunities, the Publishing – Newspapers industry’s long-term earnings growth rate of 13% looks promising. This also compares favorably with 9.8% of the Zacks S&P 500 Composite.

Though the valuation looks a little pricey at this time, keeping long-term expectations in mind, investors may look for some good entry points in the stocks that will help them make the most of the momentum in the industry.

While none of the stocks in our Publishing – Newspapers industry currently sport a Zacks Rank #1 (Strong Buy), there is one stock that carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

New Media Investment Group Inc. NEWM: The consensus EPS estimate for this New York-based company, which owns, operates and invests in a portfolio of local media assets, has moved up nearly 10.7% for the current fiscal in the last 30 days. Moreover, this Zacks Rank #2 stock has rallied 34% over the past year.

 Price and Consensus: NEWM

Given the promising prospects of the Publishing – Newspapers industry, investors may hold on to some stocks that can fetch great returns in the near future. Here are two such stocks:

The New York Times Company (NYT - Free Report) : This New York-based provider of news and information carries a Zacks Rank #3 (Hold) and has gained 46% in the past year. The Zacks Consensus Estimate for the company’s current fiscal EPS has been stable in the last 30 days.

Price and Consensus: NYT

Gannett Co., Inc. (GCI - Free Report) : This McLean, Virginia-based company carries a Zacks Rank #3 and has gained 20% in the past year. The Zacks Consensus Estimate of this media and marketing solutions company’s current fiscal EPS was revised 3% upward in the last 60 days.

Price and Consensus: GCI

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