April 09, 2018 - 8:50pm EST by
2018 2019
Price: 23.25 EPS 0.91 1.07
Shares Out. (in M): 162 P/E 25.5 21.7
Market Cap (in $M): 3,828 P/FCF 0 0
Net Debt (in $M): -483 EBIT 221 251
TEV (in $M): 3 TEV/EBIT 15.1 13.3
Borrow Cost: General Collateral

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For the past few years it seems that the strategy of The New York Times Company has been to grow digital revenues while trying to limit declines in the print business.  This hand off between the two revenue/profit streams started to look better in late 2016 as the Company’s digital subscriber additions accelerated (likely driven by the intensified news cycle around the US election).  The stock ran from the low-teens to the mid-20’s and is now trading at 25.5x next year’s EPS estimates and 12.1x next year’s EBITDA estimates (up from 20x and less than 7x in 2016).  As growth in the digital business starts to slow, I believe it will become clear that the digital business won’t fully offset print declines given the difference in revenue/profitability per subscriber, and the company’s valuation will contract.   


On the surface the stock’s move makes sense given that 2017 was the first time in several years that the company was able to grow revenues.  Online subscriber growth, which hovered in the low 20% range in 2015 and 2016 accelerated to 60%+ in early 2017.  The net result was a $110MM year-over-year jump in online subscriber revenues vs. the more typical $30MM annual gain seen in the prior two years.  Sequential growth in subscribers has fallen back down to the mid-single digits, meaning that as you anniversary the big gains from early/mid 2017 growth rates will start to normalize.  The company may also face renewal pressure as the initial early 2017 subscribers begin to renew at full price (alternatively, this could create a tailwind for revenue/subscriber). 


Print subscriptions in 2017 continued their long-term trends.  The company continues to raise prices to offset circulation declines.  This strategy has worked so but, absent a change in consumer preferences, it doesn’t seem like a long-term winner. 


Looking at advertising revenues it appears that a similar shift between digital and print is taking place.  Ad revenues make up 33% of total revenue and have decline in 11 of the past 12 quarters.  Print advertising, which makes up 57% of total ad revenues, has been declining double-digits and shows no signs of stabilizing.  Digital ads, on the other hand grew 14% last year (including an extra week), an acceleration from the 6% growth in 2016 (again this took off just as the subscriber numbers accelerated).  Next quarter, however, digital advertising revenues are expected to be down year-over-year based on Company guidance. 


From a higher level, I think it makes sense to look at the print and digital businesses separately.  As consumers shift from print to digital the company needs to grow digital fast enough to offset print declines.  Combining the print related subscription and advertising revenues you get just under 60% of total Company revenues.  After assigning print production costs (which I assume include the Raw Materials, Other and D&A expenses from the Income Statement) you get contribution profit of close to $675MM last year (down from $695MM in 2016 and $765MM in 2015).  Digital revenues, on the other hand, generated just under 35%of total Company revenues or $580MM last year (up from $440MM in 2016 and $395MM in 2015).  Again, given the subscription jump in 2017 that is now slowing, I would expect growthe rates to come down next year. 


These two cash flow streams (the shrinking print profits and the growing digital revenues), along with a smaller “other” business representing 6.5% of revenues, must support core costs of approximately $1.1bn which include wages and SG&A.  I see these expenses as central to the business (news gathering and corporate overhead).  They must be maintained regardless of how the Company monetizes its product (digital vs. print).  Despite growing 8.5% last year (including an extra week) these costs have been relatively stable for the past several years resulting in significant operating leverage. 


Breaking the business down the subscriber type you see a similar story with disproportionately high revenue and profits for print subscribers.  Discounting on digital products more than offsets the incremental cost of producing the print version of the paper, meaning that the company must grow its digital subscriber base 3x for every lost print subscriber just to hold profits flat.  Print subscriptions are currently offered for $65 for four weeks or $845/year after an introductory 12-week period where the subscription is discounted by 50%.  Digital subscriptions can be had for as low as $16/month after a one-year $9.00/month introductory period.  The net result is that a new print subscriber will pay $745 in year one, stepping up to $845 in year two while digital subscribers will pay $108 in year one stepping up to $360 in year two (again providing a tailwind for revenues if the subscriber sticks around).  Adding subscription and advertising revenues together and deducting print related costs (as discussed above and using an estimate for the number of print subscribers as the company stopped disclosing that number), I estimate contribution profits for the print business are approximately $760/year/subscriber vs. approximately $260/year/subscriber for digital.

I believe that in order for the current valuation to be justified you need subscriber growth to continue at 2017l's elevated evels or the company needs to start charging more for its online products, both of which seem unlikely.  Given the depressed valuations reached before the 2016 new cycle the stock could easily fall to the high teens from today's low 20's level.   


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


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