Publishing Turns a Page
By Sam Stovall
A new name on S&P's list of this week is publishing. This group, which includes newspaper companies such as Gannett (GCI ), has been running ahead lately, as the broader market has recovered from the early-October lows. Year-to-date through Oct. 25, the S&P Publishing Index rose 10.9%, vs. a 21.2% drop for the S&P 1,500 Super Composite index. Soft advertising demand and cost-cutting characterized operations through the first half of 2002, but newspaper advertising has shown signs of strengthening in recent months, with increases in every category except help-wanted classifieds.
S&P analyst William Donald has accumulate recommendations on most of the newspaper publishers he follows, including New York Times Co. (NYT ), Tribune (TRB ), and Washington Post Co. (WPO ).
At S&P, we remain relatively neutral on magazine and book publishers in general, but we have accumulate recommendations on Scholastic (SCHL ) and Meredith (MDP ). Publishers with significant holdings of TV broadcast properties -- such as Meredith, New York Times, Tribune, Gannett, Media General (MEG ), and Belo (BLC ) (formerly named A.H. Belo) -- should benefit from heightened demand for TV stations on the expectation that ownership limitations will be lessened or lifted entirely sometime this year. S&P's favorite name in the group is Gannett, which is ranked buy, or 5 STARS.
Newspaper ad revenue could rise about 2% in 2002, after declining 9.8% in 2001. Magazine ad revenue is expected to be down an additional 5%, after dropping 10.3% in 2001. Ad revenues for magazines had advanced 14% in 2000. Newspaper circulation revenues should rise 4% to 5%, while magazine circulation revenues could be off 2%.
Cost cuts have helped publishers survive the ad downturn. Modest wage increases, staff reductions, and reduced benefit packages should help keep a lid on personnel expenses. Paper prices have dropped significantly and are expected to stay low for most grades of paper. However, postage costs for mailed subscriptions should rise over the course of the year, thanks to rate hikes that went into effect on June 30.
Publishers' overall book sales are likely to grow roughly 3% in 2002, after gaining a modest 1.9% in 2001. Children's books, one of the healthier segments, has benefited from several very popular series such as Scholastic's Harry Potter and from the sale of TV-show and movie tie-ins, including the Lord of the Rings series. No new Harry Potter books were published in 2001, but one may be out by the second quarter of 2003.
Adult trade books, characterized in 2001 by sluggish unit sales and greater discounting, should show very modest growth in 2002. In spite of softness in some segments, sales of medical, technical, and nursing professional books are holding up well. College texts are also healthy. Although state adoptions of grade-school texts and materials won't be as heavy in 2002 as they were in 2000 and 1999, the year should still be good for elementary-through-high-school book sales.
S&P Relative Strength Rankings
These industries carry 12-month relative strength rankings of "5" as of Oct. 25, 2002 -- meaning they're in the top 10% of the 115 industries in the S&P Super 1,500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior 12-month price performance.
*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).
Stovall is chief investment strategist for Standard & Poor's