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January 25, 2006

New York Times: Fourth Quarter Earnings Preview

There should not be too many surprises when New York Times (NYT) kicks off the earnings season for newspaper companies before the open on Tuesday. In late December the company preannounced the quarter and guided to 59-62 cents excluding 14-15 cents of severance costs.

The company experienced somewhat better revenue growth in the fourth quarter as national advertising trends picked up slightly. However, NYT continues to face headwinds due to weaker than expected national ad trends, particularly in the entertainment, travel, and wireless industries.

The fact that newspaper companies are hurting is nothing new. Even though NYT is staring at a drop in earnings of 15% for 4Q05, the big question is whether there is hope for recovery in 2006. Presently, analysts are expecting a flat year for EPS at around $1.59 vs. $1.55 in 2005, beginning with a 1Q06 report of 29 cents vs. 30 cents a year ago. To reach a positive earnings comparison for the year, analysts are assuming 3% top line growth. The 3% figure includes revenues from the company's internet properties including About.com and NYTimes.com. These properties are experiencing much faster growth so the implication is that print advertising and subscription revenue will barely be growing in 2006.....

As previously mentioned, a slight uptick in ad trends in October and November offers some hope that revenues in 2006 will improve. This means there will be a lot of focus on the company's December revenues and any comments about the outlook. Analysts will also be looking for some numbers on the companies move to put a lot of content behind a paid subscription model. I subscribe to New York Times Select for $40 a year. This gives me access to certain columnists and free archives. I'll also be interested in margins trends. Margins are under a lot of pressure (probably down 300 basis points or more in the December quarter). Layoffs and other cost controls are battling against rising newsprint prices and increasing compensation costs primarily due to benefits.

I have been very consistent calling to avoid the newspaper group unless you believe advertising trends can pick up to the mid-single digits which will provide operating leverage. I stand by that opinion as I believe current valuations, which are at the low end of historical standards, are accurate. The industry faces huge challenges and the accelerating loss in subscribers in 2006 means that investors will not reward the industry with higher multiples. In fact, I would argue that multiples hould be lower givent he secular challenges and in comparison to other media sectors that offer higher growth potential. I do not believe 2006 will see a big upturn in revenue trends for NYT or the group. A buyout of Knight Ridder at 10 times current year EBITDA will provide support for the group but it will also max out the multiples. Putting a 20% public market discount on the group means the stocks are appropriately valued assuming 2006 witness a slight up year. Too boring for my blood with estimate risk still to the downside.

Posted by Steve Birenberg at January 25, 2006 07:59 AM in NYT