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January 04, 2006

Dow Jones Jumps 10%

Dow Jones (DJ) was in the news yesterday as the stock rose more than 10% after the company increased 4Q05 EPS guidance and named a new CEO. I believe the move is mostly the result of the guidance bump despite persistent takeover rumors surrounding DJ. It seems to me that appointing a new CEO and announcing better-than-expected EPS should place a damper on takeover rumors. Wouldn't the Bancroft family that controls DJ want to give the new CEO a little time, say, at least a year at the helm, especially after a positive surprise that suggests the repositioning of the company into electronic delivery and the launch of the Weekend Edition might be working? Also, some of the unexpected strength driving the EPS upside is because long depressed categories like financial and technology ads spurted in December. Again, might not the Bancroft family see this as a sign that the macro factors, which have depressed results, are moving into the history books?

Excluding takeover potential, I have a hard time seeing the shares move above the low $40s where they would be trading at more than 13 times 2006 estimated EBITDA, a premium of over 30% to the rest of the newspaper group. Only a sale of Knight Ridder (KRI) at in excess of 10 times 2006 EBITDA (more than $70) would justify that high of a multiple for DJ, in my opinion. If I owned DJ shares, I would ride the renewed momentum in earnings with a target in the low $40s.

Posted by Steve Birenberg at January 4, 2006 11:26 AM in DJ