Newspaper publishing stocks have few friends on Wall Street. They have treaded water since the New Year, and most now trade below the prevailing price-earnings ratio--26--for the Standard and Poor's 400-index of industrial stocks. That's quite a comedown for the group, which usually trades at a 20% or better premium to the market's p-e. Are newspaper stocks dogs? Or are they that Wall Street grail--an "underappreciated stock."
Well, some contrarians are betting newspaper stocks will be winners in the months ahead. The theory is that advertising is at last on the upswing, abetted by a reviving economy. For the most part, the newspaper "story" has been ignored, or underplayed, by all but a few brokerage house analysts. "We've seen some convincing evidence that lineage has bottomed mut and is turning up," says Michael Hoover, an analyst at U.S. Trust, where portfolio managers are accumulating newspaper stocks.
STRONG SHOWING. Lucrative classified advertising began to bounce back in 1992. At Gannett, classifieds bottomed a year ago and gained 6% in January, 10% in February, and 1.5% in March--a strong showing, Hoover points out. Display ads began to recover shortly thereafter. Analysts have been generally unmoved by the group's ad recovery and strong financial position. But some are coming around. "This industry has been through some really tough times, yet they've done a good job of cutting costs, reducing debt, and generating cash," says Robert Nelson, an analyst at Standard & Poor's.
Once ad lineage recovers, profits should surge because of newspapers' pricing power--a byproduct of their monopoly position in many areas. Most forecasters see big gains in '93 except at Knight-Ridder, where a recent acquisition has hurt earnings. Overall, says Cornelius Sewell, who follows newspaper stocks for Argus Research, profits should rise 15% in 1993--far better than 1992's 10% gains.
Sewell thinks share-price gains will be healthiest in the stocks that were hurt most in 1990 and 1991. His two favorites are Times Mirror, publisher of the Los Angeles Times, and Dow Jones, publisher of The Wall Street Journal, where ads are rebounding. Other safe bets are companies with strong franchises in a broad array of markets. Apart from Gannett, they include Knight-Ridder, Midwest newspaper chain Lee Enterprises, and the Tribune Co., publisher mf the Chicago Tribune. With rising newsprint prices a perennial problem, the Tribune Co.'s paper mills provide an additional benefit.