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October 21, 2005

Dow Jones: Ugly But Not A Disaster

Dow Jones (DJ) reported 3Q05 EPS of 12 cents, below consensus of 13 cents. The press release stated that 4Q05 EPS would be in the low to mid 30 cent range against current consensus of 47 cents. The press release went on to note that weekday ad lineage for the Wall Street Journal would be down in the mid-single digits despite meeting the "up slightly" guidance for September.

Upon reading this information I thought that the reaction in DJ stock would be ugly, much worse than current trading levels which are down about 2% from yesterday's close. However, after listening to the conference call and reviewing other data, I think the news should be classified as disappointing but not a disaster.

First, the 4Q05 EPS guidance include 5-6 cents of dilution from the new Weekend Edition of the WSJ. I believe that some of the estimates still do not take this into account given that there is a 13 cent range from the high to low estimate. This still suggests lowered guidance but maybe just a nickel or so. Second, on the call management noted in response to heavy questioning that about 50% of the advertising in the initial editions of the Weekend Edition had been shifted from the weekday editions. Further, if this advertising were shifted back to weekdays, 4Q lineage guidance for the weekdays would be up slightly. Thus, no deterioration in recent slight improved trends.

While this is comforting news, it still leaves me with some questions and suggests that no significant turn in advertising trends or EPS is at hand:

• 50% shift toward the weekend says to me that so far the weekend is not being viewed as compelling by current WSJ advertisers. Management says the goal is to bring new advertisers to the weekend but if half the ads are shifted it seems like not enough new advertisers are committing so far
• If overall lineage for the WSJ on a Monday-Saturday basis is "up slightly," why is there a shortfall of at least a nickel in 4Q EPS? Trends in Electronic Publishing are solid and while the community newspapers are struggling there was no indication they would get worse in 4Q. This leaves me thinking that either the explanation of 4Q ad trends is masking weakness or that costs are up more than expected. I suppose there could be some below the line explanations like the tax rate or interest expense but I didn’t get the impression from analysts questions that this was the case.

DJ shares spiked in August on takeover rumors. Over the past month, accelerating in October, the takeover spike and then some has come out the stock. In fact, DJ now is in the bottom half of the group for YTD performance, where it should be based on the fact that it has had the worst financial results and the highest multiple in the group.

Based on information available today I have a hard time seeing a major turn in EPS or EBITDA in 2006. Analyst estimates assume a sharp improvement. So I remain unattracted to the shares despite seeing them approach 52 week lows. However, the takeover rumors provide some downside support. Given all the initiatives underway at the company in electronic publishing, the weekend paper, and the redesign of international and domestic weekday editions of the WSJ, I have to believe that the Bancroft family will give the management team another year to prove that the changes are working. This potentially sets up a buying opportunity if the shares took one more leg down, maybe if they break $30. All else equal, if the stock were below $30, we can probably assume the growth initiatives would not be working satisfactorily. At that point, you would have a frustrated controlling shareholder sitting on a unique asset that is arguably worth a 70% premium to then prevailing share prices.

Coming off another weak quarter with another reduction in guidance that is my playbook for DJ shares. No interest yet but definitely on the radar screen.

Posted by Steve Birenberg at October 21, 2005 02:17 PM in DJ