New Media Investment Group – a potential turnaround story?

New Media Investment Group (NEWM) is an American company that invests in media services and digital marketing. The company emerged out of bankruptcy in 2014 (formerly GateHouse Media), and is managed by private equity titan Fortress Group.

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I came across this company while reading one of Macro Ops‘ letters; a savvy community of global macro investors which I have the great fortune to be a part of. This company caught my attention as it happens to be engaged in an industry where almost everyone I know is pessimistic and bearish on.

The rise of social media and increasing usage mobile phone apps have led to the declining usage of traditional forms of media like the radio and television, and it has also affected the print media industry (newspapers and magazines) and irrevocably changed the way advertising is done worldwide. It is probably a secular trend that is unfolding before our eyes.

The data below from Magna Global compiled by Bloomberg tells us everything:

US magazine industry advert.JPG

global advertising by category.JPG

We all know this as this trend has played out for at least over the past decade. It’s an old story.

The internet is the fastest-growing medium for advertising, growing at an estimated 14% CAGR in 2015-2018. According to Zenith Optimedia, global mobile ads may even surpass desktop mediums by end of 2017. This trend is also driven by costs, as traditional forms of media (like television) are more costly. Newspapers are the most expensive medium to advertise in the US – US$115 cost per thousand impressions (CPM) back in 2015, as compared to online display at just a mere US$12 – more than 90% cheaper.

High cost + declining usage = not too pleasant a situation!

US advertising platforms.JPG

To have an idea of the situation, check out this article covering what the venerable New York Times is going through (another one with more stats and data here).

With all this going on, one wonders if the print media industry will eventually some day disappear altogether. However, New Media Investment Group (NEWM) takes a different view. The company has taken advantaged of the pessimism surrounding the print media and newspaper industry in the States to go on an acquisition spree over the past 3 years.

NEWM now boasts a huge portfolio that includes more than 500 community community publications, over 500 related websites, and 6 yellow page directories that spans across more than 30 states. Many of these services owned by the company are local community content in the US. One can see their portfolio here.

Many of these high quality local print media companies are inefficient and have high cost structures, and are behind the curve in entering the digital space. By acquiring them, NEWM will have synergies and make their portfolio of assets more efficient by streamlining and centralising operations, creating real scale while at it.

The kicker about NEWM is its strategy of growing shareholder value by increasing revenue and cash flow by expanding their digital marketing services and expanding their online advertising business. Simply put, management intends to transform their traditional local media assets into dynamic multi-media operations, and monetise these new digital sources via online/digital advertising. 

NEWM owns several digital businesses like Propel, which is a digital marketing solutions provider that offers software-as-a-service (SAAS) products for businesses. Management expects its digital source of revenues to expand rapidly and to drive bottom-line growth going forward.

Micro fundamentals like liquidity and solvency ratios have been healthy since its emergence from bankruptcy. Below is a snapshot of its profitability figures over the past 7 years:

profit

NEWM currently has a market capitalisation of US$ 818 million as of 24 February 2017, and offers a dividend yield north of 8.0%.

Traditional valuation metrics like the price-to-book and price-to-sales ratios over the past 3 years also indicate that valuations are relatively depressed (the consensus is pessimistic on the print media industry), making this company a rather excellent value/turnaround play should the markets start to reprice its stock.

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NEWM currently trades at 7.0 X TTM EV/EBITDA. Assuming a fair multiple of 15.0X price-to-earnings ratio, an upward revaluation of NEWM’s stock price could mean an estimated potential upside of more than 40%!

Sell-side analysts are rather mixed on NEWM’s prospects: out of 4 official calls, 2 are for ‘Hold’, and the other 2 are split between a ‘Buy’ and ‘Sell’ rating.

According to Macro Ops proprietary insider-buying model however, NEWM ranked extremely high with strong insider buying, which is very often a good sign of the future prospects of a company:

insider-buying-model

Some of its institutional owners include investment titans like Vanguard Group, T. Rowe Price and BNY Mellon, as well as hedge fund king Leon Cooperman’s Omega Advisors.

Given the above situation, which sounds like a mispricing opportunity, this play could take 1 to 2-years for it to work out. On NEWM’s share price charts, it is in a consolidation mode with price moving sideways and going nowhere. This is an ideal situation for a mid/long term investor to accumulate a position:

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Moreover, the current environment of Fed monetary tightening is drawing capital back to the US in a gradual manner, making investors pay attention to equity market valuations. This situation makes value plays like NEWM highly ideal as market participants move money to areas of compelling valuations and as multiples of ‘growth plays’ are reassessed by value-wary investors.

I will have to monitor the situation closely and perhaps take a dive into it once technical price action begins to signal a turnaround.

*image credits to http://i.forbesimg.com, http://www.newmediainv.com*


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