News Corp Bidding For Dow Jones

I would use strength in newspaper stocks away from Dow Jones (DJ) to take profits. The Wall Street Journal is a far different asset than typical newspapers, and the company is much further in diversifying from print publishing than other newspaper companies. DJ has potential buyers like News Corp. (NWS-A) or General Electric (GE). Who is the premium buyer for other newspaper companies?

News Corp. is getting ready to launch a competitor to CNBC, so beyond the company's expertise in managing newspapers around the world, the news collection and brand of the Journal and Barron's could be attractive to News Corp. I don't know how long the CNBC deal with the Journal lasts or how tight it is.

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.

Dow Jones: Transition To Digital Underway But Too Early To Own

Dow Jones (DJ) reported earnings a day ahead of schedule due to the announcement of its acquisition of the 50% interest in Factiva owned by Reuters. Reuters and DJ formed a 50/50 joint venture for Factiva in the late 1990s. DJ will now control of Factiva and consolidate its financials. Factiva is a subscription based service sold to enterprises so they can search selected and tailored media content in specific applications.

DJ’s 3Q earnings and 4Q guidance were largely inline with street expectations so the acquisition of Factiva dominated the conference call. In general, management argued that the deal is very attractive financially and adds a solid mid single digit revenue growth business which further dilutes the company’s overall exposure to print advertising. Analysts seemed to accept this argument but appear concerned that Factiva has had decelerating financial performance this year and is subject to the same secular pressures from Google, free websites, and RSS that is negatively impacting the print business. I think the decline in the shares today is a sign of investor dislike of the Factiva deal....

DJ reported 3Q adjusted EPS of 11 cents, a penny ahead of estimates. The upside came from excellent expense controls as revenue trends deteriorated throughout the quarter culminating in a 6% decline in advertising revenue at the Wall Street Journal in September. Specific ad categories continue to perform in line with recent trends with technology and real estate weak and general ads and financial sluggish.

The Weekend Edition seems to be on target although management discusses the financial impact including the spillover to weekday advertising and overall circulation economics. This was not the case when the idea was announced which makes me think that the standalone Weekend Edition is underperforming expectations.

One weak spot in the quarter was an increase of just 12% in online advertising. Management attributed the subpar growth to a flat July and noted that MarketWatch is outperforming WSJ.com. August and September grew 20% and the forecast for 4Q is 20%. Given Yahoo’s comments about financial advertising and some general concern on display advertising I wonder if something larger might be at work.

4Q guidance calls for low to mid 40 cents in earnings on a low to mid single digit advertising gain at the Wall Street Journal. This is inline or slightly below current consensus.

Overall, I give DJ management credit for aggressively moving to limit its exposure to print advertising, attack its cost structure, and manage print revenues aggressively. The company seems to emulating the EW Scripps strategy although the growth profile of its diversification efforts is lower. Given aggressive management action and the natural fit of DJ’s content to the web, I am most interested in DJ shares as a potential buy among newspaper stocks. However, I still think the shares are too expensive and remain interested only on additional weakeness of 10-20%.

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.

Dow Jones Shows Signs of Life

Dow Jones (DJ) reported better than expected 2Q06 earnings. EPS rose 15% to 39 cents, ahead of the consensus estimate of 35 cents. Revenues actually came in a little light of expectations, growing just 6%, but margins expanded and operating income rose over 16%. This quarter showed evidence of the operating leverage that investors expect from DJ. I think this is the main reason why the shares are responding so well to the quarter, especially in light of 3Q EPS guidance that was several cents below the current consensus.

DJ shares still look too expensive to me, but with evidence of operating leverage finally emerging, I feel that 2007 estimates now look more realistic. This makes the premium valuation more palatable. I don’t think the stock will visit my buy point in the $20s. Downside should now be limited to recent lows assuming the market doesn't get further clobbered. If you want exposure to newspapers, DJ is the stock to own....

One thing that I think will limit upside in the near-term is that with recent strategic initiatives seeming to gain traction, pressure from the Bancroft family to sell the company will remain low. The unique nature of DJ's assets and the control by the Bancroft family are partially responsible for the premium valuation. For now, the stock will be driven by perceptions of the top line and how that translates to big gains down the income statement given the return of DJ's operating leverage.

As mentioned, the company guided 3Q below current estimates. In my preview, I mentioned that tougher comparisons loomed. I think analysts were not surprised by the guidance. Furthermore, I think Q&A revealed that the guidance is probably conservative. The company exited the quarter with pretty good momentum, including 5% growth in the top line at the Journal after backing out the Saturday edition. Management acknowledged the tougher comps and pointed to a stall in the recovery for recovery advertising and a sharp reduction in the growth rate of classified real estate advertising. They also commented that given that business leader confidence was declining due to a slowing economy and the geopolitical tension, they decided to budget cautiously. Investors bidding up the shares today expect that 3Q EPS will be closer to the 17 cent consensus than the low teens guidance. I think they are probably correct.

DJ's biggest division is consumer media which includes the Journal, Barron's, Marketwatch, and the other online businesses. Operating leverage was very high in this division with a 9% revenue gain translating to a 47% operating income gain on a 170 basis point rise in margins. Looking just at the print editions, management noted that over 80% of incremental ad revenue fell to operating income.

The digital businesses grew a faster than expected with ad revenue up 23% and subscription revenue up 33%. Marketwatch growth picked up and outperformed the corporate average. Subscription revenues benefited from growth in WSJ.com subcribers and the new revenues coming from separating Barron's Online.

The smaller divisions did not receive a lot of focus on the conference call. Enterprise had an excellent margins but top line growth remained limited at under 2%. Community Newspapers eked out 1.7% top line growth but saw operating income fall over 4% as it is feeling the same pressure as other traditional newspapers.

Finally, management spoke positively about future cost savings with respect to the redesign of the Journal to a smaller width. These savings should start hitting in 2007 providing further support for continuation of the operating leverage witnessed in 2Q06.

Dow Jones Showing Some Potential

I have no real complaints with the earnings report or conference call from Dow Jones (DJ). The report and guidance commentary is inline with evidence of upside potential to the 2006 outlook. This optimism has the stock trading higher, up 2% when the call started and up 3% as the call wraps up.

I can’t really get comfortable with valuation at DJ when it trades at a 20% plus premium to the group even if you assume operating leverage in 2006 and 2007. However, I also understand the willingness of investors to pay a premium and follow improved momentum in operating fundamentals. Given the good action in the shares of late as long as optimism about upside to 2006 and 2007 results holds, I think the shares could trade to the low to mid-$40s. I won’t be aboard for that trade though as my approach in media tends to look for value and growth, not growth and momentum....

DJ reported 41 cents in the quarter against a 40 cents consensus estimate. Revenues of $482 million matched consensus. At the segment level, Print Publishing operating results looked light to me, while Electronic Publishing looked better than expected. Print revenues were OK but margins seem light. Management noted several items that pressured costs such as newsprint, severance, circulation and promotion initiatives, and Weekend Edition. Excluding these areas, expense control was fine. Management feels these areas will moderate considerably as 2006 unfolds.

Electronic Publishing results were driven by better than expected margins with operating profits coming in better than expected and offsetting the shortfall in margins in Print Publishing. There was one issue in Electronic Publishing which seemed to bother analysts based on numerous questions: Consumer Electronic Publishing, composed of Marketwatch and WSJ.com, had only 11% growth in the fourth quarter. Given growth rates in other internet media advertising this is clearly too low. Management admitted this and pointed to transition issues at Marketwatch related to changes in advertising sales executives, consolidation of online brokerage firms, and new selling strategies. Management seemed confident that these issues were behind the company ad revenue growth would accelerate in 2006. This area represented 10% of DJ's fourth quarter revenue, the highest online exposure of any newspaper company. IF you want to argue for a premium valuation for DJ, this is the reason why. Not just the fact that the relative exposure is higher but also that potential upside for these national brands is higher than other newspapers may have with locally based websites.

Regarding 2006 guidance, 1Q06 EPS was projected at "low teens" with advertising linage growth in the mid single digits. Weekend Edition dilution of 6 cents is a penny or tow higher than expected. Overall, I'd call this guidance in line with current expectations. New CEO Rich Zannino provided a good amount of color on the full year 2006 and I'd say he was optimistic and this accounts for the good reaction in the shares. Basically, he outlined a year that would show strong underlying momentum in revenues with margin expansion. Better trends at the Journal will be accompanied by a pickup in revenue growth at Electronic Publishing. Given the higher than expected margin base in Electronic Publishing in the fourth quarter this provides upside to current EPS estimates.

As stated in the beginning, I understand the reason for the optimism and could bless jumping in on DJ at current prices if I were a more momentum based investor in media stocks. For now, investors are going to give DJ the benefit of the doubt and assume operating momentum will accelerate. At the first sign that this maybe a falsse start, the shares will get ugly, but until that point – which may not occur – downside risk is not significant for DJ shares.

Dow Jones Earnings Preview

I don’t expect much action in Dow Jones (DJ) following the company's earnings report before the open on Thursday. The stock took a big jump on January 3rd when the company preannounced better than expected earnings so only the guidance and commentary on January trends seems like it could generate any excitement. On that front, New York Times (NYT) confirmed the December strength in national advertising yesterday but noted that January was off to a weak start. NYT also reminded investors that January is a small month and they felt the better December and 4Q05 advertising trends were likely to hold. It is hard to have confidence that will be the case given the persistent weakness since 2004, the prior false starts, and the secular challenges the industry faces. One other factor that can influence DJ shares but is sure to go unmentioned on the conference call is takeover speculation. I don’t think that the Bancroft is likely to force a sale this year given that the former COO Rich Zannino was just elevated to CEO and there appears to some improvement in fundamentals....

The company guided to around 40 cents in EPS for the quarter which was above prior consensus of 35 cents. In 4Q04, DJ earned 43 cents. The full year will come in at just under $1, down from $1.21 in 2004. 2006 estimates average $1.18. Revenue for the quarter is projected at $482 million. A normal seasonal slowdown has 1Q06 EPS and revenue estimates at 13 cents and $449 million, respectively.

It is worth remembering that DJ has the most operating leverage in the newspaper group if advertising turns up. Additionally, advertising trends for DJ are largely based on business-to-business advertising. Technology and financial are the biggest factors. Financial has recovered somewhat but Tech is still lagging. Several analyst note that very recent trends look good as telecom and tech are strengthening and comps are easy. Telecom mergers and the cable vs. RBOC showdown are the drivers of any strengthening.

The earnings report and conference call will also highlight the growing importance and continuing strength of DJ's online initiatives including WSJ.com and Marketwatch. The change in CEO's was largely viewed as an acknowledgement that this is where DJ's future lies.

DJ shares trade at over 12 times 2006 EBITDA vs. an average of just over 8 times for the group excluding DJ. The big premium is the result of takeover speculation and DJ's superior operating leverage. The bullish analysts would argue that DJ trades at less than 10 times 2007 estimates, for example. I am on the sidelines in the entire group but DJ would be one of my top choices if I return as I prefer stocks with either operating or financial leverage.

Dow Jones Jumps 10%

Dow Jones (DJ) was in the news yesterday as the stock rose more than 10% after the company increased 4Q05 EPS guidance and named a new CEO. I believe the move is mostly the result of the guidance bump despite persistent takeover rumors surrounding DJ. It seems to me that appointing a new CEO and announcing better-than-expected EPS should place a damper on takeover rumors. Wouldn't the Bancroft family that controls DJ want to give the new CEO a little time, say, at least a year at the helm, especially after a positive surprise that suggests the repositioning of the company into electronic delivery and the launch of the Weekend Edition might be working? Also, some of the unexpected strength driving the EPS upside is because long depressed categories like financial and technology ads spurted in December. Again, might not the Bancroft family see this as a sign that the macro factors, which have depressed results, are moving into the history books?

Excluding takeover potential, I have a hard time seeing the shares move above the low $40s where they would be trading at more than 13 times 2006 estimated EBITDA, a premium of over 30% to the rest of the newspaper group. Only a sale of Knight Ridder (KRI) at in excess of 10 times 2006 EBITDA (more than $70) would justify that high of a multiple for DJ, in my opinion. If I owned DJ shares, I would ride the renewed momentum in earnings with a target in the low $40s.

Dow Jones: Ugly But Not A Disaster

Dow Jones (DJ) reported 3Q05 EPS of 12 cents, below consensus of 13 cents. The press release stated that 4Q05 EPS would be in the low to mid 30 cent range against current consensus of 47 cents. The press release went on to note that weekday ad lineage for the Wall Street Journal would be down in the mid-single digits despite meeting the "up slightly" guidance for September.

Upon reading this information I thought that the reaction in DJ stock would be ugly, much worse than current trading levels which are down about 2% from yesterday's close. However, after listening to the conference call and reviewing other data, I think the news should be classified as disappointing but not a disaster.

First, the 4Q05 EPS guidance include 5-6 cents of dilution from the new Weekend Edition of the WSJ. I believe that some of the estimates still do not take this into account given that there is a 13 cent range from the high to low estimate. This still suggests lowered guidance but maybe just a nickel or so. Second, on the call management noted in response to heavy questioning that about 50% of the advertising in the initial editions of the Weekend Edition had been shifted from the weekday editions. Further, if this advertising were shifted back to weekdays, 4Q lineage guidance for the weekdays would be up slightly. Thus, no deterioration in recent slight improved trends.

While this is comforting news, it still leaves me with some questions and suggests that no significant turn in advertising trends or EPS is at hand:

� 50% shift toward the weekend says to me that so far the weekend is not being viewed as compelling by current WSJ advertisers. Management says the goal is to bring new advertisers to the weekend but if half the ads are shifted it seems like not enough new advertisers are committing so far
� If overall lineage for the WSJ on a Monday-Saturday basis is "up slightly," why is there a shortfall of at least a nickel in 4Q EPS? Trends in Electronic Publishing are solid and while the community newspapers are struggling there was no indication they would get worse in 4Q. This leaves me thinking that either the explanation of 4Q ad trends is masking weakness or that costs are up more than expected. I suppose there could be some below the line explanations like the tax rate or interest expense but I didn�t get the impression from analysts questions that this was the case.

DJ shares spiked in August on takeover rumors. Over the past month, accelerating in October, the takeover spike and then some has come out the stock. In fact, DJ now is in the bottom half of the group for YTD performance, where it should be based on the fact that it has had the worst financial results and the highest multiple in the group.

Based on information available today I have a hard time seeing a major turn in EPS or EBITDA in 2006. Analyst estimates assume a sharp improvement. So I remain unattracted to the shares despite seeing them approach 52 week lows. However, the takeover rumors provide some downside support. Given all the initiatives underway at the company in electronic publishing, the weekend paper, and the redesign of international and domestic weekday editions of the WSJ, I have to believe that the Bancroft family will give the management team another year to prove that the changes are working. This potentially sets up a buying opportunity if the shares took one more leg down, maybe if they break $30. All else equal, if the stock were below $30, we can probably assume the growth initiatives would not be working satisfactorily. At that point, you would have a frustrated controlling shareholder sitting on a unique asset that is arguably worth a 70% premium to then prevailing share prices.

Coming off another weak quarter with another reduction in guidance that is my playbook for DJ shares. No interest yet but definitely on the radar screen.