Fairfax; and why it’s pointless to buy media stocks.
Fairfax (ASX:FXJ) advertises on its Commsec page that it “publishes 240 regional, rural and community publications, has a significant presence in New Zealand, an agricultural publishing business in the US, 9 radio licenses in Queensland and South Australia and metro newspapers in Sydney, Melbourne and Canberra”. This would be quite an astounding achievement if it was the 1960s. Unfortunately in this day and age with targeted advertising from Google, superb auction and job websites like eBay and Seek and a continually discredited and biased media the empires of old are dying beasts, especially the printed variants.
Financially things just aren’t pretty. One look at the balance sheet would cause any investor to do a double take. Cash flow is negative to the tune of $270 million and it’d be worse without the $350 million of new debt. Current liabilities are larger than the net worth of the listed vehicle with 75% of the current assets being of the intangible variety. As I don’t value intangibles in the slightest the current net worth of the company is negative to the tune of $1.5 billion. With $2.5 billion of debt and little cash left in the coffers it’ll be tough for the company to grow the book value for the foreseeable future. Instead expect more capital raises which will dilute shareholders positions and an expanding debt base with the obvious interest payments.
As a value investor the stock is terrible. Basically all you would be buying is the hope that it can turn a mountain of debt and a few key assets, like RSVP, into global vehicles. I feel sorry for employees who are making an investment in the company as at this moment it is worth nothing. The only thing they can be certain of is the money that has been placed in their bank accounts previously.
Now is Fairfax special in this regard? I’d suggest not. Magazines are being shuttered all over the world as advertisers find more effective mediums for their message. Newspapers and news stations are finding it harder to entertain while shaking the dogma of being politically biased. This is of course alienating advertisers and causing people to switch off in droves as the internet provides instant gratification. But what about the portals like bbc.co.uk, smh.com.au or washingtonpost.com? Unfortunately there has yet to be tangible proof that any of them can be profitable unless they truly get advertising right while keeping their overhead to a minimum. The latter will be the hard part though as staff demands are heavy and it will only get worse over time.
Sadly the heydays of the 60s and 70s where the newspaper was the only method of advertising your goods in a city are long gone.