Fairfax Media Ltd (FXJ)

Fairfax is best known for its newspaper the Sydney Morning Herald, The Age and the Financial Review. The media landscape is changing dramatically and it would be more accurate to describe FXJ as a digital media company going forward.

The majority 51% of earnings are derived from real-estate listing site domain.com; Australian and New Zealand news media, both digital and paper accounts for 39% of earnings; and radio accounts for 10% of earnings. Domain's earnings have been growing rapidly (+33% last year) while media assets have been in steady decline as readers move away from paper to digital.

Fairfax also owns half of streaming service 'Stan', currently running second to Netflix in the new market domestically. While not yet profitable they do have 600,000 subscribers in Australia and are forecast to become profitable by 2018. In future years Domain and Stan are likely to form the core of Fairfax.

You buy Fairfax for its digital assets. If the newspapers can retain a level of profitability that is a bonus. Expect to see Fairfax moving to digital only on some mastheads and culling the least lucrative.

On underlying earnings Fairfax trades on a PE of 13x, below the market average, discounted on account of its old media assets and declining earnings. Consider that realestate.com (REA) Domain's main rival trades on 30x earnings. Fairfax is a company in transition, earnings have been on a slide recently but its showing signs of new life.

Debt is now at 18% of equity after efforts to reduce debt in recent years. The balance sheet is now in a strong position, and the company now has reasonable growth potential. Dividend yield is 6.5% gross and at current levels FXJ is well below our fair value of$0.91. Investors may be in for a bumpy ride but Fairfax has the potential to offer income and growth over the next few years.