In late December, Avista Capital Partners agreed to pay $530 million for the Star Tribune, less than half of what McClatchy paid for it in 1998. The deal comes amid growing concerns about the future of newspapers, which are facing competition from the Internet. But in spite of the ugly long-term outlook for newspapers, they may make an interesting investment for now.

For starters, Avista is purchasing the newspaper for 6.5 times its cash flow. Newspapers don't have the large capital expenditure requirements that many more booming businesses do. The industry is in decline, but it's still making money. I'm reminded of a profound statistic that I first read about in Jeremy Siegel's book The Future for Investors: Since 1957, railroad stocks have outperformed airlines, trucking, and the S&P 500.

This is of course not attributable to dramatic growth in the railroad industry. Rather, most investors saw that the companies were in decline and the share prices were driven down, and then provided a good return. The moral of the story: valuation matters. Most stocks are a good deal at the right price.

Are newspapers the new railroads? There are numerous similarities. Railroads were replaced by airplanes and trucks, but the railroad stocks were the better investment. Newspapers are being replaced by the Internet, but that in no way means that Internet stocks are better buys. Here's a quick look at some of the bigger newspaper stocks:

• Gannett (NYSE:GCI): Owner of 91 daily newspapers, including USA Today. The also own around 1,000 non-daily publications. Trades at around 11 times cash flow.
• E.W. Scripps (NYSE:SSP): Owns some newspapers, but also television stations, including HGTV and the Food Network. Also owns Shopzilla.
• Tribune (NYSE:TRB): Trades at around 8 time cash flow. Owns 11 daily newspapers, the Chicago Cubs, television stations, and other media interests.
  
  

Are newspapers the new railroads? originally appeared on BloggingStocks on Sun, 07 Jan 2007 12:10:00 EST. Please see our terms for use of feeds.