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By lunchtime today (20 January), Reach (LSE:RCH) was the third-best-performing stock on the FTSE.
Its rise of 23% followed the release of a positive (but brief) trading update, which said that the news publisher now expects to “deliver results ahead of current market expectations for the full year”.
A better headline
This is welcome news for longstanding shareholders who’ve seen the company’s share price decline by 27% since January 2020.
Worse, the stock market valuation of the publisher of the Daily Mirror, Daily Express and Daily Star has fallen 77%, since its September 2021 peak.
So perhaps today’s announcement is evidence that reports of the death of the newspaper industry are something of an exaggeration.
But Piers Morgan, who used to edit the Daily Mirror, doesn’t think so.
He recently bought his ‘Uncensored’ YouTube channel from Rupert Murdoch and says the future of news is going to be online. Morgan believes print and traditional broadcast media are in terminal decline. He recently told the Financial Times: “Linear network stuff is just dead now. It’ll take a while to die, but it’s dead … in 10 years’ time none of them will exist.”
An apparently attractive valuation
However, on paper, the shares of Reach do look cheap.
Prior to today’s market update, analysts were expecting 2024 earnings per share of 22.3p, meaning the stock was trading on a forward multiple of 3.2. Following today’s update, its price-to-earnings (P/E) ratio has crept above four. But this is still remarkably cheap by historical standards.
The stock also appears to offer good value using an assets-based approach. Its market cap is 55% lower than its book value. Having said that, over two-thirds of its assets are accounted for by an internal valuation of its 120 newspaper titles. Without approaching potential buyers, it’s difficult to know whether this is accurate or not.
Even so, income investors might be tempted to consider taking a position.
Since June 2022, Reach has kept its interim and final dividends unchanged. If this continues, it’ll pay 7.34p a share in respect of its 2024 financial year. This implies an attractive forward yield of 8.1%.
Not for me
However, despite these positives, I don’t want to invest.
The group’s improved financial performance only came in the last quarter of 2024. As the saying goes, one swallow doesn’t make a summer.
I also agree with Piers Morgan about the long-term decline of newspapers, which can be seen in Reach’s results. During the six months ended 30 June 2024, print revenues fell by 6.1%, compared to the same period in 2023.
However, digital sales were also lower (1.3%). And the latter only contributed 22% to total revenue — the group’s still heavily reliant on traditional news consumption.
In my opinion, despite the group doing well during its last quarter, I think it faces some challenges that it’ll struggle to overcome. I don’t think younger people place as high a value on traditional news as the newspaper-reading generations before them, which means putting journalism behind a paywall isn’t going to be as profitable.
And this probably explains why the shares appear cheap. Instead of seeing this as a buying opportunity, I believe this is a warning sign that other investors don’t see a ‘good news’ growth story. Therefore, I don’t want to buy.
