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Wall Street Says That Newspaper Industry Valuations Are Underperforming the Market. But Don’t Buy, It Says They’re Going Down Even More

Even though newspaper industry shares have underperformed the US markets by some 10% this year, looking like a buy bargain, Merrill Lynch has issued a report that says the shares basically have only one direction to travel and that’s still down.

As far as Merill is concerned, newspapers continue to lose advertising market share, circulation is in decline, and even though newspaper web sites are seeing increased advertising revenues those additional revenues are not offsetting what is being lost on the print side.

Goldman Sachs, in as similar report, said that even though the newspaper industry is underperforming, shares need to drop an average of 16% more in order to make them an enticing buy.

Even Barrons, the respected weekly financial newspaper, believes that such major media companies as Tribune Co., and Knight-Ridder are valued low enough already that they could be targeted for leverage buyouts from private-equity firms.

Media companies are doing what they can to increase their value. Accepting that print ad revenues are still weak and expected to stay weak – Merrill estimates 2005 print advertising growth at 3.3% whereas Internet advertising growth rocketed 26% in Q1 alone – the major media companies have so far this year invested more than $1.5 billion buying up Internet based companies.

Bankers believe media companies need to redeploy anywhere from 10%- 20% of their market capitalization into New Media business.

Major acquisitions this year include:

  • Gannett’s $100 million purchase of PointRoll, an online ad marketing company that enhances advertising via technology.
  • E.W. Scripps’ $525 million for Shopzilla, a comparison shopping site. 
  • Dow Jones’ $525 million buyout of the financial site, CBS MarketWatch.
  • The New York Times Company’s ’ $410 million purchase of About.com from Primedia
  • Gannett, Knight-Ridder, and Tribune teaming up to buy a 75% share of Topix.net for about $5 million.

Knight-Ridder, the second largest US newspaper publisher, is as good an example as any of the economic difficulties in turning a print powerhouse into one where the Internet takes on a major role within its business. K-R has newspapers in 28 US markets and it is very actively involved in each of its markets online. It has teamed also with Gannett and Tribune to increase its overall Internet business such as the recent topix.net purchase.

K-R online revenues grew by 39% in 2004, providing a $36 million profit on revenues of $114 million. But those numbers represented just 4% of K-R’s total revenues. The Internet business needs to assume a far higher profile within K-R’s product mix if higher profits based on higher revenues rather than severe cost cutting, are going to push the share price up again.

As it is, K-R has already warned that its Q2 profit will be flat compared to a year ago. While some of its markets showed some healthy newspaper advertising increases, others were soft. And circulation dropped by 2.4%.

At the New York Times where shares recently hit a one-year low, May saw an unexpected 4.6% increase in advertising at the parent paper, but advertising at its newspapers in New England was down 5.7% and the Times announced it expected overall lower Q2 earnings. Internet advertising throughout the group improved, however, by 23% from a year earlier.

But the Times has also announced a novel approach to bring in more advertising. It has appointed James M. Kilts, the former chief executive of Gillette, to its board of directors.  Kilts improved the earning potential of Gillette to the extent that it is now in the process of being sold to Procter & Gamble for $57 billion and if the sale goes through he will serve as co-chairman of the combined company.

The New York Times has been busy turning itself more into a national newspaper than just a New York newspaper but part of its advertising downturn has been because of softness in the national advertising market. Could Kilts’ board appointment come with the expectation that he can influence such major national advertisers as Procter & Gamble, which itself is in the midst of completely realigning its ad spend to where it thinks it gets the most bang for its dollar, to spend more money with The Times?

The stock market seemed to think so – the Times shares moving up 4.6% on the day of the announcement – the same day it gave its lower Q2 forecast.

There is one print trend beginning, incidentally, when it comes to looking up share prices, newspaper industry or otherwise -- you may not be able to find them much longer. The Chicago Sun-Times has transferred stock tables to its web site saying the web can provide far more detail on a share’s performance than can a newspaper listing.

Although some newspapers have played with trying to insert display advertising within stock tables, readers have not really taken to it, so metropolitan newspapers spend well into seven figures annually printing page upon page of non-revenue, or low revenue, agate stock table type.

The question is how dropping the tables affects circulation?. It is the wealthier readers who look at stock tables, and in most cases that means the older reader, and the statistics are clear that the older one becomes the more one tends to stay with print and not go to the Internet. And yet it is hard to argue that the Internet is perfect for such information.

If the move to dump stock tables works then don’t be surprised to see other such statistical favorites such as TV listings and the like make the switch, too.  

It all helps to cut costs, and it makes the newspaper’s web site that much more valuable – the web site prints all the numbers one would ever want to know, for instance about a share, and the newspaper prints the major stories of the day concerning the share -- a convergence of the print edition and the web site.  But until the newspapers invest in their web activities to the point that they start to attain at least 20% of the advertising revenues now attained by print, their own share prices are not likely to point north for some time yet.

Even If we won’t be able to find that specific information listed in the newspaper.

© Philip M. Stone of  Stone & Associates, a partner in followthemedia.com


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