Newspaper Investors May Have The Last Laugh

Publishers survived TV. Now they're exploiting the Net

Shares of newspaper publishers have been hit so hard you would think the Net is going to wipe out newsprint. After soaring 36% in 1999, the Standard & Poor's Publishing-Newspaper Index has fallen 12% since Jan. 1. Knight Ridder, Gannett, and New York Times have traded as much as 40% off their 52-week highs. Investors even gave the cold shoulder to Tribune, after its $8 billion purchase of Times Mirror. Skeptics call it a merger of dinosaurs.

There's some old-fashioned economic thinking behind the slump. Federal Reserve tightening has investors worried about an economic slowdown and a hit to ad sales, which account for up to 80% of industry revenues. Meanwhile, publishers are bracing for a hike in the price of newsprint, which constitutes 25% of their costs. Amid this gloom, newspaper stocks are trading around 6.5 times current cash flow, near the bottom of their range, says CIBC World Markets analyst Rudolf Hokanson.

But thanks to a flood of retail store and dot-com ads and a tight job market that is keeping classified pages filled, ad revenues are expected to rise 6% this year. And new printing technology is cutting costs. Reason enough for publishers to deserve a cash-flow multiple of 9, says Credit Suisse First Boston analyst Steven Barlow. John Morton, a media consultant in Silver Springs, Md., predicts publishers will bolster earnings 10% to 12% this year, despite higher newsprint prices.

WEB TRANSFER. As for the Net, analysts say publishers are starting to show success in transferring their brands to the Web. Gannett's is beginning to ring up a profit. Dow Jones's Wall Street Journal Interactive Edition, the largest paid-subscription site according to CIBC's Hokanson, posted a 41% leap in subscriptions in 1999. "Value-added content will always be in demand," says Hokanson, making newspapers a good long-term play.

The most obvious bargain may be Chicago-based Tribune. It already owns the fourth-largest network of local TV stations (after ABC, NBC, and CBS), plus seven papers in the top 30 markets. With Times Mirror, the Trib should have the ad-sales leverage to produce a 13% hike in cash flow this year and a 17% rise in earnings, says Standard & Poor's analyst William Donald. Hokanson thinks Tribune, now around 37, may hit 66 in the next 12 to 18 months.

Another stock to watch is Gannett, the nation's largest newspaper publisher. It's "enjoying solid top-line growth and keeping cost controls intact," says Barlow. With a huge amount of free cash flow, Gannett has a fat war chest for acquisitions. Its profits should swell 19% this year, says S&P's Donald. Barlow's target for the shares: 90 in the next 18 months, vs. around 70 now.

Dow Jones, meanwhile, has fallen less than 1% so far this year, following a 41% gain in 1999. With ad sales sizzling at The Wall Street Journal and Barron's, S&P's Donald expects revenues to gain 17% this year and earnings per share to surge 35%. Hokanson thinks Dow Jones, now 72, will hit 83 within 18 months.

In the 1950s, it was TV that was going to kill the newspaper industry. Now, it's the Internet. "We've heard it all before," says Morton. "A newspaper is cheap, easy to use, portable, and a great way to get information out to the masses without straining eyes or a budget." Right now, investors are thinking the worst. Perhaps they should think again.