Thad McIlroy, a consulting colleague and friend who co-wrote The Metadata Handbook, recently tweeted a link to a Bloomberg interview with Bill Smead, a so-called "contrarian" investor. In the exchange, writer Lewis Braham asked Smead "Why do you own [newspaper publisher] Gannett?" Smead said:
"A lot of people think the newspaper business is dying. Warren Buffett doesn’t and we don’t. Gannett trades at four times cash flow and they retired $3.3 billion of debt in the last five years, raised dividends 150 percent and are doing stock buybacks. Maybe Gannett doesn’t last 50 years but at the price we’re paying, it only needs to survive like, five for someone who owns the stock to get their money back. If it lasts longer — say 15 years — it will be a great investment. Professional journalism is probably the most undervalued it’s been in my 54 years of life. We get a free bet on the newspapers with this stock, as Gannett also own 23 television stations and CareerBuilder.com and other Internet-based properties. We’re paying about $15 a share and it’s worth at least $25."
It's a curious and telling assessment, on at least three fronts:
- Gannett is not "the newspaper business"; it's just one company
- Warren Buffett does think the newspaper business is dying; the newspapers bought by Berkshire Hathway fetched lower prices "because their revenues are going to decline"
- If your time horizon is five years, it's safe to say that you aren't thinking much about the industry
It's heartening to hear an investment manager say that professional journalism is undervalued, but Smead's assessment has little to do with the quality of Gannett's newspapers. It has a great deal to do with its free cash flow.
In publishing, there are lots of ways to improve free cash flow, some of them detrimental to the long-term health of a business. As Mathew Ingram noted in June, "Unless you are reinvesting, you are in liquidation." There are some good ways for newspapers to reinvest, but in the near term following my advice may make them less appealing to Mr. Smead.