It really is remarkable, but, by sound valuation methodology, Reuters was last week worth about the same as Mirror Group. Which would you rather own? (Clue: it isn’t the Mirror Group).
I’m not talking price earnings (p/e) ratios here, which are well out of fashion among the new City cognoscenti, who drink Chilean chardonnay rather than claret and know the names of the Spice Girls.
To them, p/e ratios are something that dull old accountants dream up. Much preferred is the trendy price-to-free-cashflow model, which in the case of both Reuters (cutting-edge online information delivery) and Mirror Group (old media) amounts to a multiple of some 20 times – or, in other words, a 20 per cent cash yield. This is real, rather than imaginary, which is case with the old p/e.
But the real issue is why newspapers should be doing so well in stock market terms presently.
The answer, apparently, is that newsprint prices are at last falling. It follows that newspaper groups are expected to do rather better in the eyes of the City than they have done recently.
What is strangely forgotten is that this is a cyclical industry. And the one thing about cyclical industries is that profits go up when raw-material prices go down. Profits do, however, have a habit of going down again when the cycle turns against them. One hopes that enthusiastic buyers of newspaper shares remember that. In the meantime, Mirror Group looks overvalued, compared with Reuters.
Not that it was only Mirror Group looking inflated last week. At one point midweek, the tight market in Daily Mail “A” shares pushed their price up 45p to 15.57.5p. Enjoy the ride while it lasts.
Elsewhere, Pearson, publisher of The Financial Times, had a less happy ride, its shares falling at the start of the week by some 30p to 750p, the largest percentage decline among FT-SE stocks at the time. The view is that investors got over-excited by bullish broker recommendations over the new year period and started to take profits.
Pearson’s shares had enjoyed the most tremendous bull run until this point, with NatWest Securities and Merrill Lynch backing them all the way up to above the 780p level (Merrill had advised clients to buy the shares up to 850p). New chief executive Marjorie Scardino and finance director John Makinson had also been buying into the stock to provide an extra boost.
Merrill Lynch was behind support for cable operator Telewest, which put on 5p to 124p at one point, the US investment house setting a target of 183p.
We learned why by midweek: Telewest reported record subscriber growth in the final quarter of 1996. Its total residential customer base rose by nearly 34 per cent on the year, with 50 per cent taking both TV and telephone lines. If Britain’s largest operator can take the rest of the cable industry with it, it may be that we are witnessing the turning point in what has been a sorry marketing story to date.
Meanwhile, BSkyB enjoyed the support of an enthusiastic research document from Kleinwort Benson, which argued, among other things, that the digital industry, scheduled for launch in the autumn, is worth about 130p of a target-price of 700p (the shares were trading at 558p at the time, but rose 3p on the news). The real action will come when the market rumbles that Rupert Murdoch has recognised that the digital future lies in satellite, rather than terrestrial, delivery.
An oldish rumour also emerged in the market that BT is poised to strike a deal with Japanese telecoms group Nippon Telegraph & Telephone, but NTT has long claimed its ambitions are to remain independent. That may be to push its price up – but the speculation also pushed BT’s price, adding 6p early in the week to 424p.
Rumour centres on a 300m joint venture in the French telecoms market. NTT is thought to be eyeing a ten per cent stake in Cegetal, the main rival to France Télécom. BT is already investing some 1.1bn for a 25 per cent stake in Cegetal and NTT may take some of BT’s interest or it may take out one of the smaller shareholders. All of this is highly speculative; what we know is that NTT has ambitions in continental Europe and BT, likewise, has its eyes on Asia. So there should be growing interest in BT’s shares if anything firmer emerges. We shall see.