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October 14, 2005

Tribune: Addressing Unique Issues But Industry Challenges Remain

Tribune (TRB) are up over 2% since reporting 3Q05 earnings and conducting a conference call on Thursday morning before the open. The key takeaway from the report and call is that TRB is putting its unique issues in the past and the company's fortunes will begin to closely track the newspaper industry. Given poor trends in the industry, the lack of any signs of improving advertising or circulation growth, and multiples that still remain at historic averages, things really aren’t looking great for TRB. However, the worst appears over relative to the group which should allow TRB shares to regain some of its multiple relative to its peer group and thus outperform other newspaper stocks in the near-term....

....Entering the earnings report, TRB shares had been the second worst performer among newspaper stocks, falling by more than 20%, trailing only New York Times (NYT). This has led TRB shares to trade at an EBITDA multiple that is below its long-term average. Among newspaper stocks, besides TRB, only Gannett (GCI) also trades at a discount to its historical multiple. In fact, TRB trades at the second lowest multiple in the group, about 7.5 times 2006 projected EBITDA.

TRB's status as a poor performing and relatively cheap stock is deserved. The company's estimates have fallen steadily all year as in addition to industry woes, the company has had a series of self-inflicted wounds including: a major circulations restatement and advertising rebate at Newsday, a circulation restatement at Hoy, and the loss of tax litigation that resulted in a $1 billion tax penalty. TRB also has suffered disproportionately from poor trends in retail and national advertising due to its concentration in New York, Chicago, and Los Angeles. Los Angeles has its own set of issues as the Los Angeles Times faces tough competition and well above industry average circulation declines.

The bright light is that trends in the third quarter indicate that the self-inflicted wounds are largely winding down relative to year-over-year growth. The tax issue is well understood and analyst estimates for 2006 incorporate the higher debt and stable rather than increasing share repurchases that the higher debt mandates. This places TRB shares in the position to outperform the group if management takes shareholder friendly actions or if industry trends improve, especially for big city dailies.

As far the quarter and 4Q05 guidance goes, the company reported as expected. EPS of 50 cents actually exceeded street estimates by 2 cents. Year-over-year EPS growth was -2%. Revenue that matched street estimates. Publishing revenue was flat against a 1% increase in expenses, while Broadcasting revenue fell 2% against operating expense growth of -15%. Trends in TV were worse with revenue down 6% against a 4% increase in operating expenses. New York, Los Angeles, and Boston stations have "ratings issues" and the WB Network is off to an awful start this season. Guidance appears about as expected although the company noted that retail advertising in publishing weakened a bit more in October and television pacings are down low double digits.

Key data points to get more bullish on TRB would be confirmation of improved circulation trends and a return to growth in advertising categories and mediums that have incremental exposure to big cities. I am not yet ready to make the call but TRB has moved toward the top of my list if I ever get bullish on newspaper stocks.

Posted by Steve Birenberg at October 14, 2005 11:04 AM in TRB