It’s pretty hard to avoid all the noise over Fairfax at the moment, although from an investment perspective it is a pretty marginal issue. The languishing share price represents a lot of burned investors who are as unlikely to return as the lost readers of print. Cost cutting is not a way to succeed in business, getting new revenue is, and there is little sign of that coming. It is not just Fairfax, it seems to be characteristic of all old media companies.
David May, writing for Mumbrella summed it up pretty well:
The future for publishers of print is masterfully bleak unless they can reconcile how to better integrate digital and paper, and find a new revenue model that works – that is after they have found out that the paywall won’t work and digital display won’t work at the prices they want.
Without a brilliant idea they will be in a lot more trouble very quickly.
Take the best 50 minds in this country. Minds that don’t work in print today. Lock them away for a month. And try and get them to recreate what Google did for AdWords for print and digital. Print has to become the tail and digital the dog. And there needs to be a better way to commercialise it than paywalls and digital display.
Broking analysts are pretty simple folk. They go on past numbers and don’t really have an ability to assess new ideas. So the broker reports are not especially illuminating. Deutsche has a hold and target price of 67cents:
FXJ announced plans to monetise its online readership base by implementing a subscription model in early 2013 and integrating the digital content across the group. However with group revenues declining by 8% in 2H12F in a tough operating environment, the need to develop and grow digital revenues has acquired a new sense of urgency with the group needing to successfully execute on plans to implement a subscription revenue model for its popular news sites. In this regard we estimate that digital revenues will need to grow by some 16% CAGR from FY13 to FY15 to offset the estimated 8% decline in metro print revenues.
Goldman Sachs has a neutral rating, too, and a target price that is about the same as the actual price. Not a ringing endorsement:
There is no change to our Neutral rating. FXJ’s restructuring initiatives are a step in the right direction as the company attempts to navigate the earnings headwinds it faces. However, we are wary of: (1) execution risk; (2) whether these measures go hard enough given the tough cyclical environment and the acute structural headwinds FXJ faces; and (3) the unintended consequences of the restructuring (e.g. what impact will cutting c.20% of editorial staff have on product quality?). We will address these issues in future research.
For what it’s worth Fairfax has a prospective dividend yield above 5% and an earnings multiple of less than eight times, but in this gloomy market that is unexceptional. And in any case what matters is stopping the revenue decline.
Interestingly, the outlier is Royal Bank of Scotland, which has a target price of $1.20 and a buy. There is always the possibility that they are right.