The New Way to Collapse an Industry
We don’t have to go back very far to see the classic boom, bubble, and bust play out. In just the last 15 years, we’ve been fortunate enough to watch over-zealous traders lose their heads again and again. First, they bought tech companies for 80 times their earnings in the late ’90s and then happily purchased banks and insurance companies that were leveraged at 35 times their equity. This time, however, we don’t even need the boom or the bubble to see a bust.
We’re told media conglomerates are among the most hated industries in the market today. Everyone knows they are struggling to keep afloat with competition from the Internet. Newspapers compete with blogs and free news sites. Magazines compete with nontraditional gossip and entertainment websites. And television ad revenue is continuing to dry up because of TiVo and DVRs. Even motion picture studios and record labels aren’t realizing what they’d like because of the never-ending efforts of media piracy.
But that doesn’t explain why these companies are still trading at astronomical ratios. Take The New York Times Co. for instance. NYT is one of the most out-of-favor stocks on Wall Street, or at least that’s what you’d think. Meanwhile, it’s trading at more than 2.2 times its book value. That means that if they called it quits tomorrow, shareholders would only receive about 45% of their money. And by shareholders, I mean preferred shareholders. Commoners probably wouldn’t get a penny.
Rupert Murdoch’s News Corp is a little better at 1.5 times book, which would be a fair valuation for a growing business. Murdoch’s precious Wall Street Journal addition isn’t even helping. He can add as many of these fallen media giants as he wants. It’s still not helping him grow his bottom line.
The problem is debt. These companies are swimming in it – especially smaller, regional media companies. Citadel Broadcasting, owner of the ABC Radio Network and 4,500 affiliates, is expected to close its doors soon, even though it somehow pulled a $2 million interest payment out of thin air earlier this month. The company owes some $2 billion, but its common stock is worth about six cents per share on the bulletin boards.
We already know what happened to Tribune Co. The owner of the 162-year-old Chicago Tribune filed for Chapter 11 last December, and was just cleared to sell the Cubs and its Wrigley Field.
These stories are nothing new. They’ve been happening for a while, and it doesn’t look like they are going away any time soon. According to Reuters, television and print companies, along with automobile and airlines, are about four times more likely to go bankrupt in the next year than any other type of company
So why are the likes of The NY Times and News Corp still trading for more than they’re worth?
To us, it sounds like another case of investors covering their eyes and ears and pretending not to know there’s even a problem. So instead of building up the bubble, we’re just sitting on years of letting the bubble bounce on down the road. Today’s economic situation might just be the pinprick to pop this forgotten 20th century blister.
Last year, print ad revenue fell 18%. When these advertisers start filling newspapers and magazines again, they’ll do so in the online versions first. After all, that’s where the sweet 18-34 age group spends most of its time.
Murdoch and Turner can spend any amount of money on traditional media business they want. The industry as we know it – and the stocks that represent it – are headed for a collapse worse than the tech and financial services industries. At least tech and financials still play a significant role in the world economy. Television and print media don’t.
You can see how the market treats ugly industries. It just lets them hang out for years longer than they should. GM was dead long before Obama grabbed the defibrillators. The same has been true with television and print. That’s about to change.
Both the auto and television/print industries as we know them are showing us a new way to watch a collapse. Make sure you’re on the right side of this trade.
for The Daily Reckoning