The stock in focus this month is Fairfax Media (FXJ). A scenario which can provide good long term investment opportunities are situations where industries or companies face fundamental change.

Often markets will discount the possibilities that companies in a traditional industry will be able to adapt and prosper as that industry evolves or there is some form of structural change.

Fairfax is an example of this situation. Once riding high on the ‘rivers of gold’ as their classifieds revenue was described, in the recent decade Fairfax has seen massive industry change and disruption as online media and news has fundamentally changed their industry. Circulation rates and commensurate advertising revenue has steadily declined as more and more people are looking to online websites for their news and are demanding more immediate information. At the same time the vast majority of this content has been provided for ‘free’ as sites have chased hits and views in order to reach more potential consumers. What started as an adjunct to the paper, the website (in particular smh.com) quickly grew into something that provided people with enough timely content that they thought they did not have to buy the paper the next day.

While maintaining ownership for some of the most dominant sites in Australia, the big challenge for Fairfax has been to manage the transition from traditional print media to monetising their new online assets. This transition was made more difficult by a stretched balance sheet, but an early exit from their NZ based classifieds site Trade Me in 2012, enabled the company to pay down debt and better position themselves to transform their company into a diversified digital media business.

Finally we are starting to see the benefits of this transformation led by the Domain site. With 27% growth in digital revenues in the past six months and a total audience across all media of 10.5 million people, the site has also been able to gain the scale benefits of a technology business, with a 20% reduction in its cost base since 2012 and a 26% reduction in employees. What remains is for Fairfax to start to be perceived by the market and investors as a high margin, high growth technology company rather than a traditional print media company. This will enable investors to start to gain the true benefit of a rerating of the company and start to see it reach its full potential as an investment.

If you would like more information please call 1300 ELSTON or email info@elston.com.au and an adviser will be in touch.