What does FXJ do?
Fairfax [ASX:FXJ] is a diversified media company. It owns print and digital media brands such as The Age, The Financial Review and the Sydney Morning Herald, as well as the Domain Group (real estate advertising), a range of radio stations, regional newspapers and NZ media assets.
Once a highly profitable business, FXJ has spent the past few years dealing with significant structural change. Print media is in decline; FXJ has invested in its digital business to offset that decline.
What’s happening to Fairfax’s share price?
The investment in digital platforms has been successful to some extent. From a share price low of around 35 cents in 2013, Fairfax managed to climb to a high of around $1.10 in early 2015 (see chart below).
A big part of Fairfax’s success has been the growth in the Domain Group. From the first half of 2014, to the first half of 2016, operational earnings have doubled. Domain now accounts for 65% of the earnings of Fairfax’s metropolitan assets, up from 35% a few years ago.
But the market looked like it had priced that growth in last year. Since then, the share price has been steadily moving south.
What now for FXJ?
The lacklustre share price performance tells you the market is concerned about where FXJ’s next phase of growth will come from. The Domain Group derived revenue from signing up real estate agents to advertise with it. It has now reached 92% market penetration, which means further growth will rely on additional growth in real estate agencies.
I’m not sure Australia can fit any more in!
But if growth slows or stops at Domain, and the rest of the business is still struggling, then the share price will come under further pressure. I see no reason to own Fairfax here. If the shares fall below the recent lows, at around 75 cents, it suggests much greater share price falls ahead.
Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.
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Editor, The Daily Reckoning