The U.S. newspaper publishing industry has evolved from being a sole provider of news content and advertising on print publications to much more. The industry has seen a rapid increase in digitalization with major sources of revenue generation being advertising, subscriptions and sales, printing services as well as distribution services, among others. In order to adapt, companies in the industry distinctly focus on coming up with online editions, consolidating and taking over smaller peers.

However, analysts are a little edgy about how profitable these endeavors will turn out to be in the wake of declining print readership and advertising revenues that were for a long time the focal point of the U.S. newspaper publishing industry. This has compelled newspaper publishing houses to diversify their revenue base, trim operations, resort to restructuring, redesign print editions and invest in digital initiatives.

Changing Industry Dynamics

It goes without saying that the alignment of the print and digital model has not been an overnight phenomenon. Newspaper companies steadily catch up with technological advancements that can help them reach their target audience in a more effective manner. This is also because the dramatic shift to digitalization demanded simplification of the operating structure by divesting or separating broadcasting and other media operations from the print business.

To be more precise, the process involved the offloading of assets that bear no direct relation to core operations and finding new avenues of monetization beyond traditional advertising. Nonetheless, success is dependent on how effectively newspaper companies exploit the growing use of Internet as a medium to reach business-to-business and business-to-consumer markets.

Undoubtedly, changing consumer preferences and innovative technologies have altered the way in which news is offered and consumed. Readers now have myriad choices when it comes to collecting and reading articles on devices such as netbooks, tablets and other hand-held gadgets. Readers’ preference for accessing news online, mostly free, has made the industry’s print-advertising model grossly redundant.

Now, as readers swamped to the Internet, advertisers followed suit and so did newspaper companies. They trimmed their print operations to take to online publications, going on to implement a pay-and-read model for accessing their content. The approach backfired for a handful of newspaper companies, while some managed to make a mark in digital subscription business by maintaining exclusivity when it came to content.

Taking the game a notch higher, newspaper companies introduced rich media-enabled videos to attract advertisers, who are now tapping the online video boom to reach the right audience. Apart from this, they are providing marketing solutions to local and regional advertising clients.

Digital Closes in on Print

The New York Times Company (NYT Quick QuoteNYT - Free Report) ) had earlier highlighted that it intends to double its pure-play digital revenues to at least $800 million by 2020. The company recently stated that the number of paid digital subscribers totaled 2,783,000 at the end of the first quarter of 2018. We note that the company’s revenues from digital-only subscription products bumped up 25.8%, while print advertising revenues fell 1.8% in the quarter.

The McClatchy Company’s digital-only advertising revenues ticked up 21.6% in the first quarter of 2018, while print advertising revenues slipped 28.8%. Digital-only subscribers were 112,200 at the end of the quarter, highlighting an increase of 32.8%.

New Media Investment Group Inc.’s digital revenues rose 23.3% during the quarter. Meanwhile, traditional print advertising revenues deteriorated 12.3% on an organic same-store basis.

Gannett Co., Inc. (GCI Quick QuoteGCI - Free Report) digital advertising revenues increased 5.5% in the first quarter of 2018, while print advertising revenues dropped 17.2% on a same-store basis. Digital-only subscriber volumes rose 51% year over year to approximately 382,000.

Is Digital the Way Forward?

Although print remains a requisite, newspaper companies will continue to focus on the digital arena. Analysts believe that digital advertising will gradually take center stage and percentage of revenues from the same is likely to exceed print advertising. Companies may also increasingly rely on paywalls. Moreover, with increasing consolidation, publishing houses will continue to be disciplined buyers of local media assets.

Certainly, newspaper companies will have to remodel and restructure to better align with the growing need of marketers and millennials, affluent households and other demographic groups. Publishing companies are fast adapting to the changing face of the multi-platform media universe, which currently covers Internet, mobile, tablet, social media networks and outdoor video advertising.

Is the Industry Treading a Value-Oriented Path?

The publishing industry has outperformed the broader market over the past year. In that time frame, the industry has rallied approximately 31%, while the S&P 500 advanced 12%.

In terms of valuation, the Zacks Newspaper Publishing industry is currently trading at 21.3X trailing 12-month EPS basis. This represents a modest premium to the S&P 500 index’s 20.1X trailing 12-month earnings. The industry had been trading at a discount to the S&P 500 index from March 2015 through January 2018.

Over the last 5 years, the industry has traded as high as 33.2X and as low as 11.2X, with a 5-year median of 19.1X.

On a forward basis, the industry is currently trading at 16.9X forward 12-month earnings estimates, in-line with the S&P 500 index’s multiple. Over the last 5 years, the industry has traded as high as 19.1X and as low as 14X, with a median of 17.2X.

The valuation appears quite fair and there’s no reason why the industry can’t witness some more upside in the quarters ahead.

Zacks Industry Rank

Within the Zacks Industry classification, Publishing forms part of the Consumer Staples sector, one of the 16 Zacks sectors, though the media industry falls under Consumer Discretionary. The broader Consumer Staples sector is currently placed at the bottom of the Zacks Classified sectors (16 out of 16) while publishing occupies the top 42% (107 out of 256) spot.

We put our X industries into two groups: the top half (i.e. industries with the best average Zacks Rank) and the bottom half (industries with the worst average Zacks Rank). Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by a factor of more than 2 to 1. We rank all the 250-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. Click here to know more: About Zacks Industry Rank.

Earnings Trends

As per the latest Earnings Outlook report, the broader Consumer Staples sector paints a decent picture. In the second quarter of 2018, total earnings for the sector are expected to climb 6.8%, while total revenues are likely to grow 3.8% year over year. This follows the first quarter’s 9% increase in earnings and 3.8% in revenues.

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