2023-05-11 21:10:32 ET
Summary
- Shares of The New York Times took a beating after the company announced financial results that missed analysts' expectations on the top line.
- This decline comes even as growth continues for the business, highlighting the risk that comes with growth investing.
- Unfortunately, shares are not yet cheap enough to warrant a great deal of optimism.
Although I consider myself a value investor instead of a growth investor, I recognize that growth investing does have the potential to generate strong returns. One of the things I don't like about it, however, is that even when companies perform well, the stock might experience downward pressure. This stems from the fact that the market anticipates a certain amount of growth in order to justify the premium being paid. And if that growth falls short, it revises lower the view that investors have of the company moving forward. A great example of this coming into play can be seen by looking at news giant The New York Times ( NYT ). Despite announcing better than expected earnings when the company reported financial results on May 10th, the firm did fall short when it came to revenue. In addition to this, cash flow data has been rather mixed. Add on top of this the fact that shares of the company do look a bit pricey, and I would argue that the ‘hold’ rating I assigned NYT stock last year still makes sense.
A mixed bag
Back in November of last year, I found myself revisiting my prior thesis on The New York Times. In that article , I talked about how the company continued to grow and that it was creating value for its investors. However, higher costs were negatively impacting the enterprise and growth was showing signs of slowing. On top of this, shares of the company looked rather pricey. All of this, combined, led me to conclude that the company warranted caution. And as a result, I ended up reducing my rating on the business from a ‘buy’ to a ‘hold’ to reflect my view at the time that shares should generate returns for the foreseeable future that would more or less match with the broader market should achieve. So far, this has pretty much been the case. While the S&P 500 is up 4%, shares of the business have dipped only 0.1%.
In truth, the company's performance relative to the market was much closer on May 9th than it was on May 10th. This is because, after reporting financial results on the morning of May 10th, shares of the business plunged, dropping 7.8%. This decline came in part because of weaker than expected revenue. During the quarter, sales came in at $560.7 million. That translated to a nice increase over the $537.4 million the company reported one year earlier. But even so, the sales figure reported by the company was $8.4 million lower than what analysts had anticipated.
It's important to understand that The New York Times is no longer the company it used to be. In recent years, management has prioritized digital subscription and digital advertising growth. This was a necessary move since the physical newspaper portion of the company has, for many years now, have been in a permanent state of decline. At the end of the first quarter, the company had 9.02 million digital only subscribers. This was 9.6% above the 8.23 million that the company had one year earlier. It was also about 190,000 above the 8.83 million subscribers the company had at the end of 2022. This was instrumental in pushing digital only subscription revenue up from $226.8 million in the first quarter of 2022 to $258.8 million the same time this year. That's a 14.1% year over year improvement.
This on its own is most certainly impressive. But there were certain weak spots that investors should continue to watch. The most obvious was a 4.4% decline in print subscription revenue. Sales there dropped from $145.2 million to $138.8 million. This, combined with the continued shift away from all things print anyways, made a decline in print advertising revenue inevitable. Year over year, this metric dropped 8.7% from $49.3 million to just under $45 million. However, there were other weak spots as well. As an example, even digital advertising revenue worsened year over year, dropping 8.6% from $67 million to $61.3 million. This may seem surprising, especially when you consider that The Athletic reported higher advertising revenue year over year. However, this was more than offset by lower revenue from podcasts and other creative services. And finally, even though the number of subscribers the company has for its digital only operations increased, ARPU generated by these services dipped modestly from $9.13 to $9.04. But this was not because of the company offering special terms or anything like that. It was actually because of a lower price point associated with The Athletic.
When it comes to profitability, the picture for the company was a lot more mixed. Earnings per share, for instance, came in at $0.13, with adjusted earnings per share of $0.19. The adjusted earnings per share for the company beat what analysts expected by $0.02. Overall net income as a result of the company's performance was $22.3 million for the quarter. That was substantially higher than the $4.7 million reported one year earlier. But this massive disparity was driven largely by a $34.7 million hit that the company took for acquisition related expenses in the first quarter of 2022. Operating cash flow for the company also improved, turning from negative $14.7 million to positive $50.7 million. Even if we adjust for changes in working capital, we would have seen the metric grow from $19.6 million to $50.9 million. On the other hand, EBITDA for the company fell from $65.1 million to $51.2 million.
Given current market conditions, management has expressed an interest in making some rather meaningful changes. This might seem unwarranted when you look at the financials I already disclosed. However, if we ignore the aforementioned acquisition related costs, the company actually saw its operating expenses grow by 7.3% year over year compared to the 4.3% increase associated with its revenue. Product development was a significant contributor to this rise, jumping 20.3% from last year to this year. Management has said that it expects to slow the rate of growth in cost increases during the second half of the 2023 fiscal year, with most of that improvement coming in the final quarter. To help improve matters, the company notified about 550,000 digital news and game subscribers of price increases on their individual product subscriptions. They claim to notify another roughly 1 million of price increases by the end of this year. You might think that this would prove to be and impediment as the company targets 15 million paid subscribers by 2027. But according to management, they still believe they can get there.
Since we don't really have any idea what the rest of the 2023 fiscal year should look like, I decided to value the company using results from 2021 and 2022. These can be seen in the chart above. On an absolute basis, the stock looks rather pricey. Though it is worth noting that the EV to EBITDA multiple of the company is lower than the other metrics because the company has no debt on its books and enjoys $374.7 million of cash and cash equivalents. This excludes additional investment capital that is classified as long term. As part of my analysis, I also created the table below. In it, you can see how the company is priced next to five similar firms. With all three pricing metrics, it ended up being the most expensive of the group.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
The New York Times | 35.2 | 23.9 | 17.5 |
News Corporation ( NWS ) | 31.9 | 8.9 | 10.5 |
Pearson ( PSO ) | 25.2 | 17.6 | 6.1 |
John Wiley & Sons ( WLY ) | 25.7 | 8.5 | 11.2 |
Scholastic Corporation ( SCHL ) | 22.8 | 17.5 | 7.6 |
Gannett ( GCI ) | N/A | 17.0 | 6.2 |
Takeaway
From a purely business perspective, I really like The New York Times. I love data and information-oriented companies that thrive off of low-priced subscriptions. I believe there's a lot of potential there. But clearly, shares of the business do look quite expensive at this moment. Even the market seems to think so as evidenced by the fact that, although the company outperformed on the bottom line, a modest miss on the top line caused the stock to pull back. In the long run, I have no doubt that the enterprise will continue to do well for its investors. But until fundamentals improve on the bottom line further or the stock decreases substantially from here, I cannot take a bullish stance on it.
For further details see:
The New York Times Slumps Despite Continued Growth, Shares Expensive