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January 25, 2006

Dow Jones Earnings Preview

I don’t expect much action in Dow Jones (DJ) following the company's earnings report before the open on Thursday. The stock took a big jump on January 3rd when the company preannounced better than expected earnings so only the guidance and commentary on January trends seems like it could generate any excitement. On that front, New York Times (NYT) confirmed the December strength in national advertising yesterday but noted that January was off to a weak start. NYT also reminded investors that January is a small month and they felt the better December and 4Q05 advertising trends were likely to hold. It is hard to have confidence that will be the case given the persistent weakness since 2004, the prior false starts, and the secular challenges the industry faces. One other factor that can influence DJ shares but is sure to go unmentioned on the conference call is takeover speculation. I don’t think that the Bancroft is likely to force a sale this year given that the former COO Rich Zannino was just elevated to CEO and there appears to some improvement in fundamentals....

The company guided to around 40 cents in EPS for the quarter which was above prior consensus of 35 cents. In 4Q04, DJ earned 43 cents. The full year will come in at just under $1, down from $1.21 in 2004. 2006 estimates average $1.18. Revenue for the quarter is projected at $482 million. A normal seasonal slowdown has 1Q06 EPS and revenue estimates at 13 cents and $449 million, respectively.

It is worth remembering that DJ has the most operating leverage in the newspaper group if advertising turns up. Additionally, advertising trends for DJ are largely based on business-to-business advertising. Technology and financial are the biggest factors. Financial has recovered somewhat but Tech is still lagging. Several analyst note that very recent trends look good as telecom and tech are strengthening and comps are easy. Telecom mergers and the cable vs. RBOC showdown are the drivers of any strengthening.

The earnings report and conference call will also highlight the growing importance and continuing strength of DJ's online initiatives including WSJ.com and Marketwatch. The change in CEO's was largely viewed as an acknowledgement that this is where DJ's future lies.

DJ shares trade at over 12 times 2006 EBITDA vs. an average of just over 8 times for the group excluding DJ. The big premium is the result of takeover speculation and DJ's superior operating leverage. The bullish analysts would argue that DJ trades at less than 10 times 2007 estimates, for example. I am on the sidelines in the entire group but DJ would be one of my top choices if I return as I prefer stocks with either operating or financial leverage.

Posted by Steve Birenberg at January 25, 2006 12:25 PM in DJ