Summary
- As a post-bankruptcy equity and recent spin-off, NEWM is an undervalued and underfollowed local newspaper and online media stock that trades at 6.1x LTM pro-forma EBITDA and 7.2% dividend yield.
- Not a secular dying business: investors get a turnaround, stabilizing business with free optionality for the company to generate substantial value through accretive acquisitions, offering a compelling asymmetric risk-reward opportunity.
- NEWM owns 450+ local community newspapers that are more stable and have loyal readership base. NEWM purchases distressed newspapers at <3.5x EBITDA and has 1300 potential targets in M&A pipeline.
- One of the main competitors for M&A is Warren Buffett’s B.H. Media group, which poses limited risk since they operate in different, large, and fragmented markets.
- NEWM can leverage its strong local footprint and regional scale to cross-sell its Propel digital marketing, an organic high-growth segment with a potential $24B total addressable market.
NEWM Market Cap: $452M (Aug 14, 2014); Current Price: $15.03 (Aug 14, 2014); 2014E Target Price: $30.6
Investment Thesis
New Media Investment Group (NYSE:NEWM), a publisher of local print newspaper and online digital media, is an undervalued and underfollowed small-cap stock that trades at 6.1x LTM pro-forma EBITDA and an annualized dividend yield of 7.2%. At current valuations, we believe investors get a turnaround, stabilizing business with free optionality for the company to generate substantial value through accretive acquisitions, making the case for NEWM's compelling asymmetric risk-reward opportunity. NEWM spun off in Feb 2014 from Newcastle Investment Corporation (NYSE:NCT), a real-estate investment trust (REIT) managed by Fortress Investment Group (NYSE:FIG), after a post-bankruptcy restructuring of $1.2B debt in Gatehouse Media. As a post-bankruptcy equity and a recent spin-off, NEWM has received limited sell-side analyst coverage. NEWM's organic business has significantly improved and is close to stabilizing, with slowing same-store revenue decline (-0.5% year/year) and positive growth in same-store EBITDA (+2.5% year/year) and free cash flow to equity FCFE (+7.6% year/year) last quarter. NEWM has also grown from acquisitions made at 2.8-3.5x pre-synergy EBITDA since Sept. 2013. For instance, NEWM acquired Local Media Group from Rupert Murdoch's News Corp (NASDAQ: FOXA) at 3.4x EBITDA, Victorville Press from Freedom Communications at 2.8x EBITDA, and Providence Journal from A.H. Belo Corp (NYSE: AHC) at ~3.2x EBITDA. One of the main competitors for M&A is Warren Buffett's B.H. Media group, a Berkshire Hathaway company (NYSE:BRK.A), which poses limited risk since they operate in different, large, and fragmented markets. NEWM has a strong pipeline of 1300 (including sub-$100M) local, distressed, and undervalued newspaper targets, aggregating an active total addressable M&A market of $35B [1]. Our target price for this stock is ~$30.6 (upside of 104%), obtained from discounting at a 12% equity cost of capital the future cash flows of: {i} dividends at 40-50% of free cash flow to equity and {ii} proceeds from enterprise sale in the terminal year at 6x (base case) pro-forma EBITDA. A strong management team with incentives aligned to improve FCF per share further bolsters our long thesis.
Company Description
Reaching 12 million readers in a week and 130K small-medium business i.e. SMB enterprises, NEWM's diversified portfolio [1] of media assets contains {i} over 450 community newspapers in 27 states in US, 20% of them being dailies and the rest published up to three times a week {ii} 6 yellow-page directories, {iii} 367 websites, 345 mobile sites, and a digital marketing service, Propel, which targets an addressable market of $24B digital expenditure planned by SMBs. Unlike other similar companies that offer digital services, NEWM contracts out most of the work to third-party providers, leveraging its brand recognition and sales relationships, and still makes over 50% of the transaction value. Revenues consist of declining segments (39% of revenues) of local print and classified ads, and stable/growing segments of preprint inserts (13% of revenues), circulation (30% of revenues), outsourced commercial printing for SMBs (8% of revenues) and digital marketing (9% of revenues), which includes the Propel platform (1% of revenues). NEWM entered into a management agreement with Fortress Investment Group, which receives annually 1.5% of NEWM common stock as management fee. A performance-based incentive fee is also used to compensate executive management.
Why does this investment opportunity exist?
- As a small-cap stock, NEWM is underfollowed. Few sell-side analysts [2], and no bulge brackets, cover NEWM. Further, as a spin-off from a traditional mid-cap REIT, NEWM appears to be an orphan equity [3] that is not well-understood.
- NEWM operates in a sector faced with headwinds of declining readership. However, per a 2013 Newspaper Association of America survey [4], more than 67% of small-town residents prefer print newspaper and rely on local newspaper websites for most information. Declines in readership have been lower for local communities than their urban counterparts. With dedicated local content and multiple forms of delivery, small-medium newspapers have the pricing power necessary to stabilize circulation revenues. Regional-scale play such as Berkshire Hathaway's purchase of local newspapers from Media General [6], or current roll-up strategies followed by PE-owned Halifax Media, highlight the value of local newspapers.
- Further, the sector has a legacy of high fixed costs, large underfunded pension obligations, high financial leverage, and resultant recent bankruptcies of major newspaper companies during the financial crisis, including Gatehouse Media, Tribune, and Sun-media Group. After bankruptcy Gatehouse Media's debt was restructured and the successor NEWM's commitment to maintaining a sound capital structure is promising.
Variant Perception
- Not a secular dying business: Despite secular pressures from declines in local retail print advertising and classifieds, NEWM has improved on organic business, slowing decline in organic (same-store) revenues to -0.5% year/year in Q2 2014, compared to -3.9% and -2.8% in Q4 2013 and Q1 2014, respectively, and achieving positive growth in same-store EBITDA (+2.5% year/year) and FCFE (+7.6% year/year) last quarter. These results follow from stable/growing segments of outsourced commercial printing by third-party SMB customers (+19% year/year), circulation (+0.8% year/year), and digital marketing (4.4% year/year) in local communities in which NEWM's diversified portfolio of newspaper and online digital services operate. These segments have become a bigger part of NEWM's revenue mix, explaining the stabilizing revenues. Further, NEWM has a sound balance sheet with a modest leverage (1.9x Net Debt/EBITDA) and low underfunded pension obligations ($9.4M in Q2 2014).
- Strong Acquisition Pipeline that offers optionality of M&A for free: The changing landscape of M&A activity post-financial crisis has shifted focus to local markets and a diverse buyer pool [5]. NEWM's strong pipeline of potential acquisitions can result in significant revenue and cost synergies. Since about 75% of cost structure of newspaper publication business is fixed [8], a disciplined M&A strategy can increase circulation dramatically and lower the fixed costs because of the economies of scale. Further, NEWM intends to acquire targets that lack digital presence and expertise, and leverage Propel marketing solutions to realize synergies.
While bears could argue that, given the stabilizing trends, M&A multiples of target newspapers should be higher than the 2.8-3.5x multiple of NEWM's targets, the fact is that there are many potential deals in the pipeline of 1300 newspaper targets in a total addressable market of $35B. Many of these newspapers are run by families that may require liquidity for various reasons and because of a very negative misperception of the industry, there are very few buyers and less buying competition [9]. This is why NEWM is getting such a good deal and why Warren Buffett is also looking to acquire these businesses through his B.H. Media Group. NEWM also helps to stabilize acquired businesses because of synergies and Propel digital marketing services described above. In our valuation base case (see below), 6x is a very reasonable terminal multiple for a stabilizing business which also implies a reasonable dividend yield. The opportunity exists primarily because there is a big discrepancy between private market and public market valuation of small community newspapers. - Strong Brand and Loyal Customer Base: NEWM has a strong brand and loyal customer base of over 12 million local newspaper retail customers and 130K SMB enterprises, serviced by its 1000+ local sales force representatives. Unlike urban markets, local markets have demonstrated loyal readership because of the unique, comprehensive, and heavily-tailored content for local communities. Further, within the SMB enterprises it serves, NEWM does not have concentrated customers.
- Growth Opportunity: NEWM management has diverted resources from declining print and classified ad segments to stable and growing segments such as preprints and digital marketing. Propel, NEWM's underpenetrated digital marketing service, provides SMB enterprises with capabilities to set up online, attract new and engage with customers, and grow online. With a total potential addressable market of $24B by 2015, NEWM can leverage its strong local footprint and regional scale to cross-sell Propel digital products to its loyal customer base, and build a differentiated competitive advantage as a digital marketer in local communities.
Valuation
Notwithstanding an anemic performance of the media sector in Q2 2014 [7], NEWM posted robust results (slowed decline in revenue and achieved EBITDA growth, announced cash dividend, and a new credit refinancing) and appreciated substantially since the earnings call. Still, we believe Mr. Market has not recognized NEWM for its compelling asymmetric risk-reward profile.
Method: Over a 7-yr projection period, we discount at an equity cost of capital of 12%, shareholder's cash flows of {i} annual dividends and {ii} terminal equity sale calculated from using a terminal multiple on EBITDA and subtracting net debt. NEWM's tax schedule is modeled at a 40% tax rate after Net Operating Loss (NOL) carry-forwards of $223.1M are used up. After distributing 40-50% of FCFE as dividends, we use the residual FCFE along with any debt raised (while maintaining Net Debt/EBITDA at 2x) for acquiring targets at the desired EBITDA multiple. Revenues and EBITDA from the acquired targets are consolidated over the subsequent year, and projected to decline (or stay flat) at the same rate as organic revenue and EBITDA.
Assumptions
|
Bull
|
Base
|
Bear
|
Current
|
EBITDA Margin (2021E)
|
14.6%
|
13.6%
|
12.6%
|
14.6%
|
Dividend/FCFE (2020E)
|
41.5%
|
45%
|
50%
|
41.5%
|
M&A Target's EV/EBITDA
|
3.5x
|
3.5x
|
4.5x
|
2.8-3.5x
|
Terminal Multiple
|
7.0x
|
6.0x
|
4.0x
|
Assumptions: Organic revenues are assumed to decline -2% year/year in 2014E (for base, bull, and bear cases), and in {i} the base case to slow down in their decline gradually to 0% year/year over a 3 year period, and remain flat, {ii} the bull case to stay constant after 2014E, and {iii} the bear case to decline steadily at -2% year/year. We believe these are conservative revenue projections given that NEWM has already slowed decline to -0.5% year/year. Circulation, commercial printing, and Propel digital marketing have grown year/year and have become a bigger part of the mix as the reason for stabilization. The -2% year/year growth is very conservative in the bear case given the company has already stabilized declines in revenue to -0.5% year/year and given the sequential trend in revenue mix of higher proportion of stable/growing revenue segments.
We assume the current EBITDA margin is maintained in the bull case for 2021E, and reduced by 100 bps and 200 bps in the base and bear cases, respectively. Again, these are conservative margin projections given that NEWM has maintained a stable EBITDA margin for the past 3 quarters. Terminal multiples are 6x and 7x for the base and bull cases, respectively, which are still conservative compared to the current multiples in local newspaper businesses [1]. The M&A target EV/EBITDA is set conservatively at 3.5x for both base and bull cases, since management's record has been in the range 2.8-3.5x. Our bull case is conservative given management's guidance (Q2 2014) of 3.3x EBITDA acquisition multiples. For the bear case, we assume a terminal multiple of 4x and a worst-case 4.5x EV/EBITDA acquisition multiple, which is beyond NEWM's stated range. The bear case is based on the assumption that M&A multiples may rise for the targets (and conservatively, assumes no increase in terminal multiple for NEWM).
Our model predicts positive earnings for 2014E and a target price of $30.6 (100%+ upside). Sensitivity to key model drivers are highlighted in the Appendix at the end of this article.
Case
|
Probability
|
2014E Price
|
Upside
|
Bull
|
20%
|
$44.71
|
197%
|
Base
|
60%
|
$32.31
|
115%
|
Bear
|
20%
|
$11.53
|
-23%
|
Expected Value
|
$30.63
|
104%
| |
In a nutshell, based on our fairly conservative assumptions, NEWM is a stabilizing business with free optionality, offering a compelling asymmetric risk-reward opportunity.
Catalysts
We believe the upside in NEWM will be realized within a 1-2 year horizon, with the following potential near-term catalysts:
{i} Accretive acquisitions from the current strong pipeline of potential targets at attractive prices (3-3.5x EBITDA).
{ii} Strong quarterly results, for e.g. (1) strong performance in same-store revenues in stable segments of circulation, preprint, and commercial printing (2) continued customer acquisition and revenue growth for Propel (3) stabilizing same-store EBITDA margins across core and digital platforms, and (4) positive earnings.
Key Thesis Risks and Mitigants
- Fortress Investment Group's Incentives and Capital Allocation Risk:Potentially misaligned incentives of Fortress Investment group, for e.g. earnings-based executive compensation, may cause management to grow NEWM too big too soon by making risky acquisitions. Also, Fortress may have less incentives to sell NEWM. While these potential conflicts of interest are not ideal, we should note that Fortress now has skin in the game with 1.5% equity in NEWM tied up as management fees. The Board of Directors for NEWM is chaired by Wesley Edens, co-founder of Fortress Investment Group who brings PE-style capital allocation experience focused on improving return on capital, and a stellar career record of creating investor value. Management also contains media experts in both core and digital businesses. While the same leadership paid a heavy price of bankruptcy for the high leverage they took on before the financial crisis, they now have extinguished Gatehouse Media debt significantly, refinanced credit, and provided stringent guidance on leverage and capital allocation. There is a huge upside for Fortress and for the shareholders if financial discipline is adhered to and capital allocation decisions are well-aligned to management incentive structure. From our conversations with NEWM management, free cash flow (FCF) per share seems to be the guiding metric for incentives, and this should mitigate any capital allocation risk. Our bear case scenario captures roll-up acquisitions at 4.5x EBITDA, and investors should watch for the acquisition multiples in future deals to assess this risk. Further, increasing dividend yield beyond the guidance range of 40-50% can severely diminish free cash flow available for acquisitions and may also lead NEWM to take on higher leverage.
- Lack of Interesting Targets for Acquisition: If an accretive acquisition target is not found, or a deal cannot be closed, management can pay down debt, distribute the cash flow to shareholders as a special dividend, or just build on the cash balance. However, from our conversations with management, it seems that the M&A pipeline is promising and a disciplined consolidation focus can offer free optionality for capturing additional value.
- Concentrated Shareholders: About 4 firms own 25% of the stock, including value-oriented hedge fund Omega Advisors (13%) and Van Guard (4.9%). In addition to considering the usual illiquidity risk associated with small-cap stocks, investors should also be mindful of timing and sizing their NEWM position, should concentrated shareholders exit the stock.
Appendix: 1
Sensitivity of Upside to Key Drivers for Base, Bull, and Bear Cases
- Base
M&A Target's EV/EBITDA
| ||||||
3x
|
3.25x
|
3.5x
|
3.75x
|
4.0x
| ||
2017-21E Organic Revenue %Y/Y Growth
|
-1%
|
234%
|
143%
|
95%
|
65%
|
46%
|
0%
|
278%
|
171%
|
115%
|
81%
|
59%
| |
1%
|
327%
|
202%
|
137%
|
98%
|
73%
| |
M&A Target's EV/EBITDA
| ||||||
3x
|
3.25x
|
3.5x
|
3.75x
|
4.0x
| ||
Terminal Multiple
|
5x
|
211%
|
125%
|
79%
|
52%
|
34%
|
6x
|
278%
|
171%
|
115%
|
81%
|
59%
| |
7x
|
345%
|
217%
|
150%
|
110%
|
84%
| |
Equity Cost of Capital
| ||||||
10%
|
11%
|
12%
|
13%
|
14%
| ||
Terminal Multiple
|
5x
|
103%
|
91%
|
79%
|
69%
|
59%
|
6x
|
144%
|
129%
|
115%
|
102%
|
90%
| |
7x
|
185%
|
167%
|
150%
|
135%
|
121%
| |
Terminal Multiple
| ||||||
4x
|
5x
|
6x
|
7x
|
8x
| ||
2021E EBITDA Margin
|
12.6%
|
28%
|
59%
|
90%
|
120%
|
151%
|
13.6%
|
44%
|
79%
|
115%
|
150%
|
186%
| |
14.6%
|
60%
|
101%
|
141%
|
182%
|
222%
| |
- Bull
M&A Target's EV/EBITDA
| ||||||
3x
|
3.25x
|
3.5x
|
3.75x
|
4.0x
| ||
2015-21E Organic Revenue %Y/Y Growth
|
-1%
|
379%
|
237%
|
163%
|
120%
|
91%
|
0%
|
455%
|
284%
|
197%
|
146%
|
112%
| |
1%
|
543%
|
338%
|
235%
|
175%
|
136%
| |
M&A Target's EV/EBITDA
| ||||||
3x
|
3.25x
|
3.5x
|
3.75x
|
4.0x
| ||
Terminal Multiple
|
5x
|
283%
|
168%
|
110%
|
75%
|
52%
|
6x
|
369%
|
226%
|
153%
|
110%
|
82%
| |
7x
|
455%
|
284%
|
197%
|
146%
|
112%
| |
Equity Cost of Capital
| ||||||
10%
|
11%
|
12%
|
13%
|
14%
| ||
Terminal Multiple
|
5x
|
138%
|
123%
|
110%
|
97%
|
85%
|
6x
|
188%
|
170%
|
153%
|
138%
|
123%
| |
7x
|
239%
|
217%
|
197%
|
178%
|
161%
| |
Terminal Multiple
| ||||||
4x
|
5x
|
6x
|
7x
|
8x
| ||
2021E EBITDA Margin
|
13.6%
|
49%
|
87%
|
125%
|
164%
|
202%
|
14.6%
|
66%
|
110%
|
153%
|
197%
|
241%
| |
15.6%
|
84%
|
133%
|
183%
|
232%
|
281%
| |
- Bear
M&A Target's EV/EBITDA
| ||||||
3.5x
|
4x
|
4.5x
|
5x
|
5.5x
| ||
2014-21E Organic Revenue %Y/Y Growth
|
-2%
|
9%
|
-13%
|
-23%
|
-30%
|
-34%
|
0%
|
37%
|
6%
|
-9%
|
-18%
|
-24%
| |
1%
|
54%
|
18%
|
0%
|
-11%
|
-18%
| |
M&A Target's EV/EBITDA
| ||||||
3.5x
|
4x
|
4.5x
|
5x
|
5.5x
| ||
Terminal Multiple
|
3x
|
-14%
|
-30%
|
-38%
|
-42%
|
-46%
|
4x
|
9%
|
-13%
|
-23%
|
-30%
|
-34%
| |
5x
|
32%
|
5%
|
-9%
|
-17%
|
-23%
| |
Equity Cost of Capital
| ||||||
10%
|
11%
|
12%
|
13%
|
14%
| ||
Terminal Multiple
|
3x
|
-32%
|
-35%
|
-38%
|
-40%
|
-43%
|
4x
|
-15%
|
-19%
|
-23%
|
-27%
|
-31%
| |
5x
|
1%
|
-4%
|
-9%
|
-14%
|
-18%
| |
Terminal Multiple
| ||||||
3x
|
3.5x
|
4x
|
4.5x
|
5x
| ||
2021E EBITDA Margin
|
11.6%
|
-42%
|
-36%
|
-30%
|
-24%
|
-17%
|
12.6%
|
-38%
|
-31%
|
-23%
|
-16%
|
-9%
| |
13.6%
|
-33%
|
-25%
|
-17%
|
-9%
|
-1%
| |
Appendix: 2
References
[1] Recent 10K, 10Q, S1, and earnings presentations of New Media Investment Group, Source. 2014.
[2] J. Stewart, A. DeBone, New Media Sell-side reports of Compass Point, Research and Trading, LLC, 2014, via Thomson ONE, accessed Aug 2014.
[3] J. Greenblatt, "Chips off the old stock: Spin-offs, partial spin-offs, and right offerings", Chapter in "You Can Be A Stock Market Genius," Simon and Schuster, 1997.
[4] Newspaper Association of America, "Two-thirds of residents in small towns and cities read community newspapers," Source. Accessed Aug 2014.
[5] Dirks, Van Essen, and Murray, "Changing landscape of Newspaper Acquisitions" Source. Accessed Aug 2014.
[6] D. Blagg, "What Warren Buffett saw in Newspapers," Forbes, Jan 2014.Source. Accessed Aug 2014.
[7] N. Tadena, "The quarter that most media would like to forget," Source. Accessed Aug 2014.
[8] P. Myers, "The Vanishing Newspaper, Saving Journalism in the Information Age," University of Missouri Press, 2009.
[9] J.S. Sanders, "Newspapers Round a Bend," The Financial Manager, Nov/Dec 2013, via Bond and Ceparo, Inc. Source. Accessed Aug 2014.
Disclosure: The author is long NEWM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The underlying research has been conducted by the author as part of his summer analyst internship with Nishkama Capital, LLC. Our firm Nishkama Capital, LLC, is long and owns shares of NEWM. Nishkama Capital does not have any business relationship with any company whose stock is mentioned in this article. The author, or entities that the author advises may make trades in securities mentioned without notification. The information contained in this article is impersonal and not tailored to the investment needs of any specific person. You should consult with a professional where appropriate. The author, or his employer, shall not be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. The opinions expressed in this article are for informational purposes only and should not be construed as investment advice. The article is not a recommendation of, or an offer to sell or solicitation of an offer to buy, any particular security, strategy or investment product. The research for this article is based on public information that the author considers reliable, but the author does not represent that the research or the article is accurate or complete, and it should not be relied on as such. The views and opinions expressed herein are current as of the date of this article and are subject to change. Any projections, forecasts and estimates contained in this article are necessarily speculative in nature and are based upon certain assumptions. In addition, matters they describe are subject to known (and unknown) risks, uncertainties and other unpredictable factors, many of which are beyond the author's control. No representations or warranties are made as to the accuracy of such forward-looking assumptions. It can be expected that some or all of such forward-looking assumptions will not materialize or will vary significantly from actual results
By VJ Shil
No comments:
Post a Comment