Back in October, 2014, Citi analyst Jason Bazinet was bullish on New Media Investment Group stock. The parent company of GateHouse Media and the State Journal-Register was selling at better than $18 per share at the time and Bazinet set a price target of $41.00 on the stock.
Two years later the price was down below $15, slightly more than where the stock opened as a spin-off of Newcastle Investment Group in February, 2014.
The analysts saw this coming earlier this year:
- In April, Citi downgraded New Media from Buy to Neutral and lowered its target price to $17.
- In July, Compass Point downgraded New Media from Buy to Neutral, lowering its price target to $20 per share.
- In August, Citi downgraded New Media from Neutral to Sell, lowering its price target to $13 per share.
- In September, Barrington Research downgraded the stock from Outperform to Market Perform.
So what happened?
Obviously New Media operates in a distressed industry facing year-over-year revenue declines. But it exacerbates its challenge by demoralizing journalists — who create the product the company is selling — along with the sales force and managers with its quarter-to-quarter quest to maximize cash flow.
The core problems are the same as we identified back two years ago based on our on-the-ground work with employees at its properties. We made this points back in September of 2014:
- Relentless cost-cutting has diminished the quality of New Media newspapers. While the company improved its cash flow by slashing newsroom staffing, it also invited readership decline.
- The debilitating employee churn extends to the very top of newspaper operations. At the State Journal-Register – one of the key properties in the company – publishers have come and gone at a dizzying pace.
- Aggressive circulation pricing also contributes to readership erosion.
- Readership decline accelerates the migration of advertising to other media.
- Digital advertising will keep growing, but not fast enough to offset print revenue declines. More robust websites could speed that growth, but New Media has stripped many of its news operations to the skeleton.
- Propel Marketing might or might not become a significant revenue source.
Since we raised those issues two years ago, New Media went on a buying spree. By acquiring properties at good prices and slashing the work forces, New Media has been able to maintain strong cash flow.
But underlying problems remain:
- Constant cost-cutting in the news gathering operations has caused further product erosion, both in print and on-line.
- This erosion accelerated the decline of print circulation. Raising the price of the print product stabilizes circulation revenue in the short term, but it will ultimately accelerate this decline.
- While revenues from digital advertising and Propel Marketing continue to rise, this growth can’t offset the rapid decline in print advertising. So the company keeps kicking its top line growth projections down the road.
- By forcing salespersons to sign non-compete agreement, the company slowed the sales churn by also ran off experienced salespersons with strong client relationships.
- Acquisitions have dramatically increased the company’s debt load.
- The company continues to churn journalists, salespersons, publishers and national-level management as morale declines.
- The company’s major investment in journalism, the GateHouse Media Center for News and Design in Austin, is a big cost-saver. But centralized editing, production and content production weakens the connection between local newspaper operations and the communities they are supposed to serve.
- Circumstances surrounding the sale of the Las Vegas Review-Journal raised journalism ethics concerns that drew national media coverage. The ensuing fallout raised concerns about the company’s leadership team.
- Increasingly hostile labor relations have prompted NewsGuild locals to rally public support in key markets like Springfield, Ill., Rockford, Providence and Erie — further impacting circulation and advertising revenue. The company is piling up Unfair Labor Practice charges across the country while galvanizing employee discontent.
- Relentless newsroom cost-cutting has triggered unionization at newly acquired properties in Lakeland and Sarasota. Guild organizing in Florida was unheard of until New Media bought properties in that famously anti-union state.
That might be the ultimate vote of no-confidence of New Media Investment Group by its employees. As industry analyst Rick Edmonds told the Columbia Journalism Review after the Florida papers unionized:
“I don’t know if this is two in a series of two or two in a series of 12. But it’s not a good thing for your business if your journalists are saying, ‘We can’t really serve our community.’”
So the story is the same as it was two years ago. Every warning we raised about this company has rung true.
Wes Edens and Co. at Fortress Investment Group will keep collecting big money as the external managers of New Media. Shareholders will continue collect dividends . . . while they last.
The individual properties and their product will continue eroding and at some point the reckoning will occur — just as it did for GateHouse Media in 2013 under this same management team of Michael Reed and Kirk Davis.