« More Comcast Internet News | Main | Private Equity Comes To Canada - Officially »

April 17, 2007

Dow Jones 1Q07 Provides Upside Surprise

Dow Jones (DJ) kciked off the 1Q07 reporting season for media compananies with better than expected performance thanks to strong ad pricing at the Wall Street Journal in March and tight cost controls. Adjusted EPS of 24 cents beat the consensus estimate of 19 cents as revenues of $507 matched estimates.

Management reiterated guidance of 25-40% EPS growth in 2007 which equates to $1.40 to $1.55. Current consensus is $1.47. No reason to read anything negative into the fact that DJ did not raise guidance after the beat as the high range still encompasses the extra nickel.

Investors are cheering the report sending DJ shares up more than 3%, though they are trading off their morning highs. I think there are a couple of things at work. First, recent trends at the Wall Street Journal have been quite weak and comparisons get tougher until 2H07. The fact that ad pages fell almost 7% in March but revenues fell less than 1% is a hopeful sign that the company can navigate the tough comparisons. Second, I think a lot of folks were expecting a miss and estimates to fall. A relief rally is part of today's upside action....

Looking at some other details of the quarter, online results surprised to the upside with revenue rising 30%. MarketWatch, WSJ.com, and Barrons.com all contributed. The recent acquisition of Factiva appears to be hitting expectations. Factiva is not a great growth business but it is better than print and seems to offer some operating leverage opportunities that are also evident in the online assets. The local newspaper division continues to struggle with revenues falling about 5%.

DJ now looks on track to make around $1.50 this year. 2008 estimates are $1.74. If the company continues to show margin upside, the 2008 numbers have decent upside. DJ shares aren't cheap even on higher 2008 numbers but given the unique asset that is the Wall Street Journal and the company's steady, and so far successful, diversification away from print publishing, investors will pay a premium for the shares.

I was hoping for a miss from DJ that would drive the shares toward the upper $20s. I'd be a buyer at that level based on asset value and the long-term potential of the transformed DJ. Additionally, disappointment would make it more likely that the Bancroft family would be a seller. Continued progress on the transformation buys newly installed management time.

I think $30-32 is probably a more realistic entry point now with earnings estimates stable to higher. So for now, my game plan is stay on sidelines and hope for an unusually good opportunity. If you have to own print publishing, I'd use DJ relative to other major publishers.

Posted by Steve Birenberg at April 17, 2007 02:21 PM in DJ