Sector financial performance:

This company, which primarily owns and operates local daily newspaper, weekly newspaper, shoppers, and websites to earn revenue by advertising, circulation and commercial printing, has been grouped into newspaper sector in newspaper industry.

It seems that the demand for print advertising of companies in this sector has been significantly decreasing in the past several years as indicated by the averaged decrease in same store print advertising revenue (average 12-19% annually in 2016-2018). While digital advertising revenue has increased, the average 3-4% growth in digital advertising revenue of companies in this sector has been far from enough to offset the declining revenue in their print advertising. The total advertising revenue has thus decreased by about annual 7-13% in the past three years. With the decline in their subscription/circulation revenue (4-6% annually- included increase in digital circulation), we still see an average annual decline of 4-6% in total revenue of those companies including impact of acquisitions).

Declining revenue has put huge pressure on companies’ margins. However, benefiting from costs cutting in employee compensation and improved margin in print circulation as a result of lower printing costs and increased price, companies improved slightly their operating margin while shrinking revenue from circulation and advertising. The averaged operating is about 5.5% in 2018 up from about 5% of 2015.

The typical enterprise price/EBI is 22 (11-35).

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Company performance:

It seems that the demand for newspaper of this company has been weak and declined in the past several years as indicated by its same store circulation volumes. While the decline in circulation volumes has been able to be offset by increased price it worsens this company’s advertising revenue, which has been declining fast due to local economic condition and business’s shifting to digital media (increased quickly).

Increase in revenue has primarily come from acquisition and issued new share dilute increased cash flow brought by acquisitions.

The first three months of fiscal 2018 compared with the same period of 2017

Net revenue increased 10.8% due to acquisitions.

The fiscal 2017 compared with 2016

Net revenue increased 6.9% due to increase of 12.5% in circulation revenue and increase of 23.3% in commercial printing (digital marketing service) offset by decrease of 0.1% in advertising revenue.

Fiscal 2016 compared with fiscal 2015

Net revenue increased 5%.

Same store revenue (excluding acquisition) decreased 2.5% attributable to decrease of 8.4% in advertising revenue offset by increase of 2.5% in circulation and of 15.6 in commercial printing (digital marketing service).

Its gross margin (including depreciation) has been at around at 39.5% since 2015. And with the flat SG&A as percentage of sales (around 33.5%), its operating margin has been at around 5.5%.

Stock performance

This stock currently has a stock price/cash flow ratio of 35. We think that its stock is being relatively undervalued compared with 65 of  TRONC, INC.