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September 25, 2006

Dow Jones Lowers Third Quarter Guidance

Following a strong second-quarter earnings report and guidance that was deemed by many observers, including myself, as conservative, Dow Jones (DJ) shares rallied from $33 to $37. The rally stalled and reversed around Labor Day. Last Tuesday we learned why. DJ lowered its third-quarter earnings guidance to 8 cents-11 cents from a previous target in the "low teens." Analysts had continued to think prior guidance was conservative as evidenced by a 3Q06 consensus estimate of 14 cents.

The prior guidance was based upon mid-to-upper single-digit advertising gains at the Wall Street Journal. In its monthly revenue report yesterday, which contained the change in guidance, DJ revealed that the Journal will fall short of a mid-to-upper single-digit gain. So far this quarter, July saw a 5.8% gain and August had a 6.9% gain. September, however, is now forecast to be negative. Taken together, it looks like the quarter will witness a mid-single-digit gain at best.....

Management noted weakness in national advertising and a shift of some advertising dollars from September to the fourth quarter. In the fourth quarter, management expects advertising growth at the Journal to resume. The company also faces a tough comparison in September against last year's launch of the Weekend Edition, especially the inaugural issue, which was heavy on advertising pages.

I had highlighted the tougher comparison in my second-quarter earnings summary and have also had concerns that the apparent momentum in Journal advertising growth was largely driven by the sixth day of publication. Along with the premium valuation for DJ shares, this was enough to keep me away from the stock despite what appeared to be a decent earnings story.

I am somewhat more optimistic about DJ's shares now that the stock has returned to its 2006 lows. DJ is a different newspaper company. It is really a content company focused on business news. The company still faces similar secular challenges to other newspaper publishers but by virtue of the fact that it is a focused content company, it has a better chance of retaining and expanding its customer base on the Internet. Recent acquisitions and management strategies largely support the long-term transition of DJ into an electronic publishing company. At some point this sets up DJ as a good stock again. I'd just like to see it even cheaper.

In the near term, I believe downside is protected by the forecasted improvement in fourth-quarter advertising growth and the unique value of DJ as an asset play with a controlling shareholder family that might be getting antsy. A new low in the upper $20s and lowered 2007 expectations might be the set-up for a good entry point.

Posted by Steve Birenberg at September 25, 2006 11:44 AM in DJ