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(George Doyle/(c) George Doyle)
(George Doyle/(c) George Doyle)

VOX

A newspaper company that prints all the right numbers Add to ...

Investors seeking growth have eschewed, quite rightly, the beleaguered newspaper publishing industry, as its members have recently been offering declining top lines. Value-oriented investors with an eye for meaty profit margins and chunky cash flow, however, have kept newspaper stocks in their sights.

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Glacier Media Inc., an owner of community newspapers and trade publications, has a little something for everyone. Its business mix has allowed it to post revenue growth since the 2009 trough; its rebounding cash flow has prompted it to initiate a dividend, giving the stock a 2.8-per-cent yield. And in an industry priced to reflect its problematic future, Glacier Media seems reasonably valued.

“Given declining debt levels, rising free cash flow, and the strengthening top line, we expect the dividend to grow significantly in the upcoming years,” says Canaccord Genuity analyst Aravinda Galappatthige, who has an “outperform” rating and a $3.20 target price, about 50 per cent above current levels.

To be clear, Glacier Media has not been exempt from the combination of cyclical and secular problems that the newspaper industry has faced. The acquisitive company used debt to finance its expansion heading into the downturn; an 8-per-cent decline in revenue in 2009, coupled with a roughly 50-per-cent drop in earnings, put pressure on the company’s balance sheet.

Since then, however, Glacier Media has been able to de-leverage; the company’s ratio of net debt to EBITDA (earnings before interest, taxes, depreciation and amortization), standing at 2.1 at the end of 2010, has dropped to 1.6 this year and, absent any more acquisitions or stock buybacks, could fall to 0.9 in 2012, figures analyst Adam Shine of National Bank Financial. (Mr. Shine has a “sector perform” rating, but a $2.50 target price.)

The company has been able to pay down its debt because cash flow is growing. Free cash flow – operating cash flow minus capital expenditures – grew strongly from 17 cents a share in 2009 to 31 cents in 2010, and is expected to rise further to 33 cents this year and then 41 cents in 2012, believes Mr. Galappatthige of Canaccord.

Its EBITDA margin, which approached 22 per cent before the recent downturn, is climbing back; Standard & Poor’s Capital IQ estimates it will touch 19 per cent this year.

Glacier’s business mix “appears to be among the steadiest” in printing and publishing, and allows the company to “sidestep much of the secular pressure facing the publishing sector,” Mr. Galappatthige argues. Its newspapers are published daily or weekly in small communities from British Columbia to Quebec, as well as in Rhode Island; it does not own the large urban dailies that have been hit hardest as consumers adopt new technologies for consuming news.

About 45 per cent of Glacier’s revenue comes from business-oriented trade publications (one example: the 87-year-old farm weekly The Western Producer). These have also faced less pressure than general interest news publications. (Disclosure: Glacier Media prints the Manitoba and Saskatchewan edition of The Globe and Mail.)

In the second quarter, Glacier’s newspaper and trade publication segment posted year-over-year revenue growth of 7.1 per cent to $68.1-million, buoyed by acquisitions and by economic strength in Western Canada. (Its much smaller professional publishing business, which produces directories and the like, was roughly flat at $3.6-million.)

Despite the positives, analysts have been cautious; Scott Cuthbertson of TD Securities Inc. cut his target price to $2.75 from $3.25 after the company’s most recent earnings, citing declining multiples in the publishing industry.

On an enterprise value – net debt plus market capitalization – to EBITDA basis, most analysts give Glacier Media a premium to other publishers because of its growth profile and balance sheet. And despite this, it still trades at a discount on a price-to-cash-flow basis: Drew McReynolds at RBC Dominion Securities, who has an “outperform” and a $3 target price, notes that a group of five Canadian publishers trade at an average of 4.8 times forward cash flow; Glacier’s figure is just 3.9.

For decades, printing newspapers was like printing money; not so much, in recent years. Glacier Media seems to be one of the last newspaper companies that still has a flavour of the old days, and it’s poised to share that cash with stockholders. With shares trading for less than the cost of a Saturday paper, buyers of Glacier Media might still make a mint in print.

 

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