The news hit the Street on the morning of Mar. 13: McClatchy (MNI) reached a deal to buy Knight Ridder (KRI), the second-largest newspaper publisher in the U.S. The planned acquisition is subject to necessary approvals. Knowing that there is no longer a stand-alone newspaper index (the Publishing & Printing subindustry index contains 15 book and newspaper publishers, as well as commercial printers), I wondered what the relative price performance for this larger group has been -- whether it was beginning to look attractive.
Sure enough, through Mar. 10, the group appears to have found a bottom, after underperforming the overall market since the summer of 2003. The chart is shown .
As a reminder, the jagged blue line represents the subindex's rolling 52-week price performance, as compared with the 52-week performance for the S&P 1500. Any point above 100 indicates market outperformance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the subindex's 15-year mean relative strength.
My first thought was, "Is it time to buy into these issues?" I decided to check with James Peters, CFA, S&P's Publishing analyst.
His fundamental outlook for the publishing group is positive. Publishers lagged the performance of the S&P 1500 in 2005, due, S&P thinks, to slower-than-expected advertising gains for newspapers in general. Year to date through Mar. 10, 2006, the subindustry rose 3.4%, vs. a 2.9% increase in the S&P 1500. With lower valuations after share-price declines over the past two years, Peters thinks the group has become more attractive.
As for newspaper publishers, Peters sees slightly lower newspaper circulation revenues in 2006, despite industry efforts to broaden circulation and raise prices. He thinks that small wage increases, staff reductions, and reduced benefit packages will be offset by higher overall benefits costs. He also expects more modest paper-price increases than in 2005, with continued declines in circulation and programs to utilize paper more efficiently, reducing the impact of the overall cost increase.
Peters expects advertising revenue growth to improve in 2006, due in part to a 53-week reporting period for many publishers, as well as Olympic and political advertising that will primarily benefit publishers that own TV stations, in his opinion.
S&P forecasts a continuation of the recent trend by newspaper companies of acquiring Web sites. In a slow-growth industry, Peters think Web sites offer an opportunity to capture a rapidly growing revenue stream. He anticipates a 25% Internet revenue growth rate for 2006, though he notes online revenues represent only about 4% of overall publishing company sales. S&P also thinks newspaper outfits will continue to try and leverage their increased consumer reach through the Internet by "upselling" customers on advertising in multiple media.
While Peters anticipates the advertising environment for magazines will continue to be challenging in 2006, he expects publishers to garner incremental revenue from online advertising and possibly through developing online subscription models. He also believes magazine publishers will continue developing special-interest publications that target growing U.S. demographic segments, such as Spanish speakers.
Publishers overall executed significant stock repurchases in 2005. S&P expects the trend to continue, as companies in this group look for ways to deploy strong free-cash flows and grow earnings per share.
Peters think a catalyst for the subindustry in 2006 may be consolidation -- of which the McClatchy-Knight Ridder deal is a prime example -- as companies look at strategic options to increase shareholder value by gaining economies of scale.
So there you have it. Maybe the worst is over for this group, from both a momentum and fundamental standpoint. Of the companies mentioned in this article, both Knight Ridder and McClatchy are ranked 3 STARS (hold) by S&P.
Source: Standard & Poor's
Industry Momentum List Update
For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of Mar. 10, 2006.