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January 25, 2006

New York Times: Decent Quarter But I Am Not A Buyer

New York Times (NYT) shares are rallied more than 2% yesterday following a decent 4Q05 earnings report. The advance is more notable given that the other newspapers tocks are all in the red today despite strong market breadth.

NYT reported adjusted EPS of 64 cents, ahead of the 59 cent consensus and the company's 59-62 cent guidance. Revenues matched consensus at $931 million. While management spoke optimistically about year end strength in advertising revenues, when I compare the press release to a couple of analyst models, it looks to me like most of EPS surprise came form non-operating items including a large jump in joint venture income. Nevertheless, the company's December revenue report was better than expected with ad revenues rising over 8%, including a gain of greater than 5% after excluding About.com. This strength was probably foreshadowed by the positive pre-announcement from Dow Jones (DJ), another company that is heavily reliant on national advertising. Overall, I'll give NYT the benefit of the doubt and call the quarter as slightly better than expected....

Regarding guidance, management laid out a lot of assumptions for 2006 but the figures are not specific to the income statement. Rather, the company announced things like a 4% price increase for subscriptions and the expectation of "very strong growth" in the digital properties. I don’t think this guidance will change analyst estimates very much, especially since the company admitted that December strength has turned into January weakness primarily due to weak spending by movie studios. January is a small month, but given the false starts and disappointing growth in 2005, I don’t think analysts will move up numbers until there are several more months of good revenue growth.

A few other highlights from the press release and the conference call:

• Cost controls continue with non-newsprint cash costs rising less than 3%. Management is trying hard to limit expense growth which should mean operating leverage will emerge if the fourth quarter strength in ad revenues continues
• Times Select, the company's fee-based online content has acquired about 390,000 subscribers of which 40% are not print subscribers. This doesn’t seem like a large number to me but analysts don’t seem bothered.
• Circulation issues remain a problem. At the Times, circ revenue fell 1%, in Boston, the decline was 7%. Only the company's small regional papers managed to produce positive circulation revenue.
• Despite circulation issues, the company announced a 4% price increase for subscribers for 2006. All else equal this will boost circulation revenue about 1% in 2006 but the impact on the total company is only about 25 basis points.
• Real estate, help wanted, color, corporate, financial services, telecom, and fashion were strong advertising categories, while entertainment and pharma were weak.

I remain on the sidelines at NYT and the entire newspaper group. The stocks are trading at the very low end of historical valuation ranges but most other media sectors are trading at all-time low valuations. Given that the secular challenges are greater at the newspapers, I don't think newspapers are cheap enough. I understand the contrarian call, particularly at NYT and DJ where operating leverage could be high if recent improvement in national ad trends proves sustainable. Additionally, the potential acquisition of Knight Ridder (KRI) could excite investors about the group. However, I think we have reached the tipping point on the group regarding the internet threat that accelerates as time passes due to demographics. It is not a battle I want to fight unless the stocks get unusually cheap.

Posted by Steve Birenberg at January 25, 2006 08:05 AM in NYT