(By Kevin Donovan) Many expect that the final humiliation for newspapers will be their own obituaries. Warren Buffet doesn't think so, and this ink-stained wretch doesn't either.
After buying nearly all of Media General's newspaper properties last month, Buffet's Berkshire Hathaway revealed last week, it had bought a 3.2% stake in Lee Enterprises (LEE), which counts Mark Twain among the alumni of its predecessor newspapers. It was Twain, of course, who famously remarked that reports of his death were "greatly exaggerated" after an obituary appeared that was mistaken for his.
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Lee has resuscitated as well, emerging this year from Chapter 11 bankruptcy protection that allowed it to restructure loan commitments weighing on it since 2005 when the Davenport, IA-based company purchased Pulitzer Inc. for $1.46 billion.
Like most investors, we admire Buffet's acumen and think the company has the potential to thrive. Buffet is, in his words, a newspaper "addict," but we suspect he loves value more. Indeed, Lee is the cheapest of the publicly traded U.S. newspaper companies on a price-to-sales basis with a ratio of just 0.10, compared with 0.15 for McClatchy (MNI) and 0.44 for the larger-cap New York Times Co. (NYT). Trading at $1.39, Lee is up 98% year to date.
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We are also encouraged by Lee's embrace of the pay-for-digital-content model that Buffet has cited as key element for newspaper profitability. In Lee's earnings release for the second fiscal quarter, CEO Mary Junck said the company expects to have most of its properties operating paid websites by the end of the year, with 10 coming online this summer.
In its second fiscal quarter, Lee reported a loss of $0.03 per share excluding refinancing, reorganization and other unusual costs, vs. a loss of $0.02 a year ago. Operating cash flow, however, increased 9.1% to $32.1 million. Operating revenue declined 3.6% to $172.3 million. Digital and print advertising combined fell 3.6% to $117.5 million, with digital alone rising 9.9% to $15.7 million.
The biggest threat to newspaper solvency has been the poaching of ad revenue by other media. If you're reading this and are of a certain age, you have likely never smeared your fingers with newsprint and squinted at the agate type for stock quotes. You can find all the investment news and views you want with the click of a mouse or the television remote. The same goes for general news and sports. And if you're looking for work, Craigslist and other internet job boards have supplanted the help wanted ads of the metropolitan daily as the most efficient way to search.
Buffet, however, sees value in the franchise power of local newspapers.
"Technological change has caused us to lose primacy in various key areas, including national news, national sports, stock quotations and employment opportunities. So be it. Our job is to reign supreme in matters of local importance," Buffet said in a letter to managers and employees of the Media General properties Berkshire Hathaway recently purchased.
He said "the original instinct of newspapers" to offer free digital content "is an unsustainable model" that needs revisiting, adding "I believe newspapers that intensively cover their communities will have a good future."
Lee could fit that mold. It operates primarily in midsize markets, with 48 daily newspapers and a joint interest in four others, digital products and nearly 300 specialty publications in 23 states. The newspapers have circulation of 1.3 million daily and 1.6 million Sunday, reaching more than four million readers daily. Lee's online sites attract more than 20 million unique visits monthly, and Lee's weekly publications have distribution of more than 4.5 million households.
Newspaper markets include Madison, Wis.; Lincoln, Neb.; Davenport, Iowa; St. Louis, Mo.; Billings, Mont.; Bloomington, Ill.; Tucson, Ariz.; and Napa, Calif.