Earnings Estimates Have Declined Steadily All Year

I have written extensively about my negative outlook for the industry and third-quarter earnings will present a bleak picture. Earnings estimates have come down steadily all year and several companies have already pre-announced earnings misses for 3Q05 while others have issued monthly revenue reports that show continued anemic growth in advertising revenue. As an example of the weakness in the upcoming reports, Merrill Lynch analyst Lauren Fine expects EPS growth in the group to range from -9% to -30% and revenues to grow just 2%. SSP might eke out a positive comparison but that company is really no longer a newspaper company.

Most Newspaper Stocks Are Close to 52-Week Lows

Year to date, the newspaper stocks have performed poorly with most stocks down between 15% and 20%. In fact, most newspaper stocks are trading quite close to 52-week lows. Despite the poor stock performance, valuations are not cheap by historical standards or relative to other struggling media industries. Based upon consensus 2006 estimates, the group is trading about 8.5 times EBITDA, which is actually in line with the average multiple on forward EBITDA since 1989. Additionally, relative to current fundamental trends, 2006 estimates still look high with consensus EPS estimates looking for upper-single-digit growth. To reach these estimates would require mid-single-digit revenue growth vs. recent trends in the 2% range.

Newspapers Discount To Other Media Stocks Has Narrowed

Other media stocks have actually seen greater multiple compression as they have shown better EBITDA growth this year. Consequently, the newspaper industry, arguably the most challenged of traditional media industries, actually trades at less of a discount to the broader media universe than usual despite the very poor stock price performance so far in 2006.

Challenges Are Long-Term

Among the many problems faced by the newspaper industry are: (1) weak auto advertising; (2) weak retail advertising; (3) sluggish national ad trends led by travel, entertainment, and wireless ad spending; (4) circulation restatements and weak circulation growth off lower base figures; and (5) a shift of traditional print advertisers towards newspaper Web sites where reach-based pricing is cheaper.

Stocks Should Be Trading Well Below Historical Multiples

Unfortunately, many of these problems are the results of long-term challenges due to the rise of the Internet and younger demographic groups not reading newspapers. Mega mergers in retail and wireless, two of the most important ad categories, are also long-term issues. This suggests to me the stocks should be trading well below historical multiples even if you believe that certain issues are cyclical and current estimates do not account for the possibility of cyclical operating leverage.

Here is a brief overview of what to expect for each of the calls we will be covering this week:

Tribune (TRB) faces all sorts of problems well beyond the success of the Cubs’ cross-town rival White Sox. EPS for 3Q05 are expected to be -5% before any additional problems due to two TV affiliates in New Orleans. TRB has faced some of the worst circulation restatements but management has encouraged the Street to look for better fourth-quarter trends. The company recently lost a big tax case which slightly reduces financial flexibility. TRB owns lots of assets, including major market TV station and newspapers. It seems like value exists but management is cautious and will not likely move aggressively to alter its strategy.

E.W. Scripps (SSP) now gets over half its EBITDA from its cable networks, which are the driver of valuation for the shares and will be the focus of the earnings call. SSP has reported big positive surprises in recent quarters but I fear that growth may slow over the coming quarters and years as HGTV and Food Network have matured. Management has done a good job investing in additional cable networks but I worry that the economics for Great American Country, DIY, Fine Living, and Shop At Home will never approach those of the first- and second-generation cable networks. If I am correct, when the Street realizes it, multiples on cable networks will contract limiting upside in SSP despite the superior results and strategies executed by the management team. I think the cable network issues could become a hot topic in 1H06.

Knight-Ridder (KRI) announced very disappointing third-quarter trends but also has a very aggressive stock buyback in place. KRI is one of the cheaper newspaper stocks and with no major insider ownership, is potentially a good acquisition target if M&A would return to the industry. KRI also offers good operating leverage if its big-city dailies return to revenue growth. I hope to heer something positive on the call that might make me want to act on this bullish bias but I doubt that will happen. Surprising cost growth in the third quarter and among the industries worst top-line trends likely will be the story.