Media stocks are starting to look very cheap

A COMMON joke in media circles is that anyone with a pound burning a hole in their pocket can become a newspaper proprietor. Russian tycoon Alexander Lebedev picked up the Evening Standard for £1, while it is said that some buyers offered just $1 for BusinessWeek (Bloomberg eventually paid $5m).

Of course, these publications were loss making and – in the case of the Standard – saddled with debt. But even profitable businesses are going for a fraction of their true value. Earlier this week, Guardian Media Group sold its regional newspaper arm to Trinity Mirror for just £7.4m in cash – a mere ten per cent of turnover (GMG will book a further £37.4m from the sale, which allowed it to get out of a 10-year printing deal with Trinity Mirror).

So, are we being too gloomy when it comes to media businesses? Lorna Tilbian, an analyst at Numis, certainly thinks so. She says Trinity Mirror’s Sly Bailey pulled off the “deal of the decade” when she snapped up GMG’s local titles. Tilbian points out that media businesses are excellent at converting cash, and often operate at high margins.

No one is suggesting that certain media properties aren’t in their twilight years (paid-for regional newspapers are definitely on their last legs). But as anyone over 60 will tell you, that doesn’t necessarily mean they have nothing left to give.

Media stocks are also looking cheap, trading on around 12 times earnings now that sector share prices have rallied about 111 per cent since March 2009. That recovery is remarkably similar to the 94 per cent rebound recorded in the last economic cycle, between March 2003 and January 2004. Back then, however, the sector ended the cycle trading at 19 times earnings.

Structural problems like the rise of online advertising and changing consumption habits mean that stocks shouldn’t be valued that highly this time round. But Tilbian still thinks they’re being sold short, with a sector valuation of around 16 times about right.

Firms like DMGT are looking cheap. It derives about 70 per cent of profits from its business-to-business division, where revenues have proven remarkably resilient, while its newspapers are among the best in the business. Similarly, BSkyB, tells a remarkable story, with stellar growth despite the recession.

Even the likes of Johnston Press and Trinity Mirror are starting to look attractive, now that declining advertising revenues are slowing and cost-cutting programmes are complete.

None of this means that the traditional media has a bright future – far from it. But investors might have jumped the gun, meaning there’s still value to be had.