Shares in Fairfax Media Limited (ASX: FXJ) have fallen by 12% in mid afternoon trade, following news that mining magnate, Gina Rinehart was looking to sell a 5% stake in the company at 50 cents last night. A $2.8 billion writedown in the value of its publishing assets yesterday and a dismal outlook didn't help.
Foolish investors, by nature take an independent view, so if the market is panicking and selling off the stock, is this the time to buy?
It's important to remember that any asset is valuable at some price, whether that's $1.00 or 5 cents. So let's take a look at why investors might purchase a stake in Fairfax.
Metropolitan Media ad revenues were down 17% in 2012. Management have already stated that this is the worst advertising market they have seen for many years, and don't expect a recovery until at least 2015. Free-to-air TV channel owners, Seven Group Holdings (ASX: SVH) and Ten Network Holdings (ASX: TEN) are facing the same issues.
Of course, management could be wrong, and the market could turnaround at anytime, including within the next 6-12 months.
On the bright side, the company's digital revenues rose 20% last financial year, and now represent 17% of the group's sales. It has the the number 1 and number 3 news sites in Australia. Fairfax also has second most popular sites for property sales, car sales and job ads. The company's Stayz and RSVP sites are leaders in their respective markets, while its trademe and stuff.co.nz are leaders in New Zealand.
Downloads of the company's mobile apps have surged, rising from less than 10,000 in May 2011, to more than 700,000 by July 2012. Plans to start charging users for content could see less visitors, but could drive up revenues (both from subscriptions and advertising).
Warren Buffett has seen value in regional newspapers, and Fairfax's regional media continues to be a main driver for the company. It's a captive market, and the papers are virtually monopolies in their regions. On average, paid publications reach 75% of the local population.
There could also be value if the company split its publishing business from its digital media businesses – similar to News Corporation's (ASX: NWS) plans. There is also the possibility of a takeover offer, with a predator possibly looking to do the same thing.
Of course there are some hefty risks. The company faces a tough few years if ad revenues don't grow. It still has more than $2.5 billion of intangible assets on its balance sheet, so more writedowns could come. Fairfax also has debts of $914m, which is slightly less than its current market cap.
Foolish takeaway
A current prices, Fairfax is intriguing. At lower prices, I'll definitely be taking a closer look.
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Motley Fool writer/analyst Mike King doesn't own shares in any company mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
