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June 27, 2006

Mid-Year Updates Provide Little Cheer For Newspaper Stocks

Newspapers companies presented to analysts last week in the annual mid-year review. I did not attend the meetings or listen in on any webcasts but I did review several summary reports prepared by analysts including Lauren Fine of Merrill Lynch and Mark Fenton of Citigroup.

Overall, the presentations gave little hope for the short-term other than a contrarian call based on lower interest in the group (as measured by lower than usual attendance) and continued pessimism on near-term fundamentals. Analysts did note that relative to recent conference calls and presentations managements were more subdued and more accepting the bearish outlook toward newspaper print advertising held by the street. This is potentially another sign that we could be closer to a bottom than current fundamentals and sentiment would suggest.

Unfortunately, any bullishness is tempered by continued weakness in advertising trends and stocks that are not unusually cheap by historical standards. Conseqeunty, I see little reason to be in any stocks in the group unless you are hoping to hit the lottery with a premium takeover bid.

Getting back the management presentations....

the big news is that strength that appeared in May advertising numbers has not been sustained in June. Only Dow Jones (DJ) indicated a good month was in place continuing a trend of outperforming the industry this year. However, be aware that DJ had a very easy comparison in June, continues to benefit from the extra Saturday edition of the Journal when none existed a year ago, and has not been able to translate better ad trends to earnings due to mix issues.

The dominant theme of the mid-year review was digital/online properties. Presently, online revenues account for about 6% of total industry revenues. Consequently, even with 25% growth rates for online advertising, total revenue growth is not able to break out of plus or minus 0% growth rate. Many managements, especially online leaders DJ and New York Times (NYT), noted that their goal is to raise online revenues to 15-20% of revenues over the next three to five years. At that level, assuming online revenues were still growing in the solid double digits, the industry would return to mid-single digit or better overall growth.

One issue with online revenue is that is not clear how much is incremental and whether the portion that is substitution for print carries similar margins. Print advertising had a high fixed cost base and online pricing is not anywhere near par with print so the mix and margin issue is real.

Looking at individual companies, as mentioned, DJ had the most optimistic presentation. The company has 761,000 subscribers to WSJ.com which makes it the equivalent of a very large metropolitan newspaper. On the Weekend Edition, management did note that in September when comparisons lapped the initial editions from 2005, overall growth rates would be worse than many due to a surge in advertising from the first few Saturday editions.

NYT noted that its TimesSelect effort which charges subscribers for premium content at NYTimes.com is off to strong start with over 500,000 subscribers (including yours truly). Management indicated that it wants to keep 95% of its content free but was looking at additional subscription products. Coming out the meeting estimates went up slightly for NYT but only because management guided to a lower tax rate.

Tribune (TRB) presented but took no questions because of its dutch tender. Management did say that June looks like a down month. The conflict with the Chandler's was discussed with the company stating that the dispute is really over taxes and valuation of certain assets held in the partnership between TRB and the family. TRB shares have given back portion of their gains since the Chandler family dispute became public news. The shares remain a good place to hide if you are bearish on the market as it still seems possible that an trigger event beyond the dutch tender could occur.

Finally, Gannett (GCI) said that 2Q estimates look OK but the quarter was not in the bag. I guess this means that if June is poor, estimates could be high. GCI also updated its full year assumptions with the only major change being a shift to negative revenue growth outlook for its UK properties. This came as no surprise to analysts and did not lead to any meaningful estimate changes.

Newspaper companies are among the first to report each quarter so we will be hearing again from them soon. Based on the mid-year review it doesn’t appear that we should be holding our breadth in anticipation of bullish news.

Posted by Steve Birenberg at June 27, 2006 02:36 PM in Newspapers