APN News & Media (ASX: APN) stock dropped around 10% on Friday to a new all-time low after releasing its half year results. Once again the 'old media' publishing assets are doing the damage.
APN is struggling to adjust to a digital 'new media' world as is competitor Fairfax Media (ASX: FXJ) and to a lesser extent News Corp (ASX: NWS). While APN's digital division is growing strongly, it's off a very small revenue base and the concern is that the company will not adjust fast enough to be able to adequately service the mountain of debt it is carrying.
It's not just the newspaper publishers either, similar issues are plaguing TV station Ten Network (ASX: TEN) where viewer eyeballs and advertising dollars are being lost to the internet.
Some businesses are doing a better job than others at this adjustment. For example advertising and marketing company STW Communications (ASX: SGN) has been much quicker to restructure and alter its business model.
APN has a diverse range of assets with exposure to Australia, NZ and Asia. Some of these assets, such as radio and digital are doing well, while others, such as the publishing division is putting a serious strain on things. The key to a successful investment in APN is accurately judging whether the bad assets will swallow the good assets or if the company can grow revenue in the digital segment enough to offset the declines in the publishing segment.
Pleasingly, APN did an impressive job of reducing net debt by $168 million in the half year. However, leverage is still very high and the possibilities of further write-downs (there is substantial goodwill on the balance sheet) mean investors need to approach an investment in APN with caution lest they fall into a 'value trap'.
It is important for investors to exercise caution around value traps. Media businesses with 'old media' assets are working hard to make the transition to the 'new media' world but it's no certainty that they will succeed. If companies like APN and Fairfax had strong balance sheets the risk/reward scenario of an investment would be a lot more appealing but Fools best be aware that the stakes are high.
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Motley Fool contributor Tim McArthur owns shares in News Corp. 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.
