New thinking on value of old
For investors "old" versus "new" media shouldn't matter. Many argue about the decline and decline of "old media" and the rise and rise of "new media", but Geoff Wilson of Wilson Asset Management believes in one thing above all else: making money.
Lately he has been buying the "old" Fairfax Media - owner of The Age and The Sydney Morning Herald - and selling the "new" carsales.com.
Wilson considers himself primarily a stock picker and says he is impressed with Fairfax's recent restructure and its plans to charge online readers, but he might also be swayed by the fact that even after a bounce it is trading on a price-earnings ratio (P/E) of 10, whereas after its recent tremors, carsales.com.au is on a P/E of 25.
The average for industrial stocks is about 13 times.
"In the short-term we believe Fairfax will do well. We've done a study of companies that have put up pay walls in the US and how they have performed. Normally there is a short-term re-rating."
Old media refers to newspapers, which require capital intensive items such as printers and transport, while new media refers simply to the internet, which is easily accessible to companies and consumers, whether it's delivered via copper wires or broadband.
There might be some short-term gains for Fairfax but few doubt it will be a long, hard road to get anywhere near the $1 billion a year in advertising revenues it had in 2005. Online advertising accounts for only about $150 million.
Others must think like Wilson.
Fairfax's stock has almost doubled in seven months and at 66¢, it has a market cap of $1.53 billion. Carsales.com.au has continued its upward trend and at $9 has a market cap of $2.1 billion.
Some perspective is in order. Fairfax was trading at $5 in April 2007, while back then carsales.com.au wasn't listed. It listed in September 2009 with an issue price of $3.50.
It is ironic that the reason Wilson likes Fairfax is its move further towards digital because, in his view, the publisher had been slow to embrace "new media". Fairfax, after all, had the chance to buy carsales.com.au in 2005, having been its second-biggest shareholder.
Instead, another media company, PBL, scooped up control prior to its listing.
One-time Australian Financial Review columnist and now Wilson HTM analyst, Ivor Ries, says that among institutions at least, Geoff Wilson's crew are the exception when it comes to selling online stocks.
"You'll see most trading above analysts' valuations," Wilson says. "But as big-performing stocks, a lot of institutions won't sell them. When you point out they look overvalued, they say: 'I know it's overvalued but it keeps going up."'
Carsales.com.au makes most of its revenues from volumes of cars sold because it's paid on the number of leads it generates.
In Australia last year, 1.1 million new cars were sold, which was the best year ever.
Ries points out that if you are buying carsales.com.au, you have to be very bullish on the Australian market for car sales.
"You're buying momentum," he says. But momentum cuts both ways. Those same fund managers holding on and buying on the way up will be leading the stampede when the shares come off.
Richard Hemming edits the Under the Radar Report: Small Caps. This is his first column for Money.