Report Card: Lauren Rich Fine

Lauren Rich Fine Merrill Lynch
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2nd Place Publishing and Printing

Bio

B.A., Tufts University. M.B.A., New York University Graduate School of Business. Fine has been an analyst covering publishing and advertising stocks for Merrill Lynch since 1988. Before that, she worked in Merrill's treasury department. She has also held financial positions at National Semiconductor (1984 to 1986) and Chemical Bank (1983 to 1984).

Industry Outlook and Style

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Sometimes when analysts say they are "neutral" about an industry, they actually mean they are "negative," but the way Fine uses the word, she really means it. "I take a neutral stance on the newspaper group in the sense that I don't see much downside risk in the stocks, since they've already discounted some of the bad news," Fine says. "But I also don't see a lot of upside potential in the new few months." In short, "this group won't be exciting any time soon."

The first quarter, in particular, is one to avoid. "You have the most difficult ad-revenue comparisons that these companies will face for the year, coupled with the fact that the economy is slower this year than last," she explains. "Classified advertising, the most cyclical component of the group, is declining year over year. Retail advertising, the largest revenue category for a newspaper, is also declining due to the tough retail environment and continued bankruptcies."

It will be safer to begin buying this early-cycle sector in the second quarter, Fine suggests. She thinks there are three main drivers to consider in deciding when to purchase these stocks: economic expectations, interest rates and newsprint costs. And although the current easing interest rate environment should theoretically be good for these stocks, she believes that the stocks have already priced in further Federal Reserve cuts.

The two names she prefers as she looks ahead to an improved environment are E.W. Scripps (SSP) and the New York Times Co. (NYT).

Fine gives three reasons she expects Scripps' stock to perform better than many of its peers. The first is that in Denver, Scripps' largest market, the money-losing newspaper recently received Justice Department approval for a joint-operating agreement with Media News Group, the private owner of the competitor newspaper. While the editorial departments will remain separate, there will be one production facility, one subscription rate and one advertising rate. Says Fine: "From a Scripps shareholder's point of view, this arrangement is good because it will eliminate losses almost immediately. Both companies will participate 50-50 in the operating results of the combined entity."

Second, Fine notes that Scripps has a quickly growing TV division. It houses Scripps' cable networks (Home & Garden, TV Food, Do It Yourself and the about-to-be-launched Fine Living). Recent sales of cable networks by other companies have uncovered the "tremendous value of these assets," says Fine. So, she continues, "As investors start to give credit to the Scripps cable networks' value based on the multiples in these other transactions, that'll help the stock."

Third, management has come to a new view of Scripps' TV stations. "They now see the stations as currency, meaning they'd be willing to sell them or swap them for other assets, which we think would bring more value to the surface," she says.

The New York Times, according to Fine, has "multiple levers it can push to make very consistent earnings growth each year. Even in a weak advertising environment, I expect the company to do better than its peer group. If it needs to, it can lean more heavily on circulation-rate increases, which is more meaningful to the Times as a percentage of revenues than it is to other newspapers." In fact, the Times has already raised subscription rates for its home-delivery service, and Fine projects that this move will produce 6 cents a share of additional earnings this year.

Besides that advantage, the Times can raise the single-copy newsstand rate if necessary. "They have the flexibility to do that because they haven't raised local circulation rates in a while." (The Times increased the price of the Sunday edition in early March.)

Additionally, Fine says the Times' mix of ads works in its favor. "They generate less of their revenues from classified ads than do most newspapers, and classifieds are the ads most affected by a deteriorating economy," she says. "More revenue comes from the Times' national ads than from classifieds, and while national ads face difficult comparisons based on how well they sell specific categories of advertising and how aggressively they raise their ad rates, I believe national ads will deliver faster-than-average ad-revenue growth for the Times," she adds.

Fine is expecting a 3% increase in industry ad revenue but at least a 4% and possible 5% gain for the Times. That, combined with circulation-rate growth, should allow the company to produce double-digit earnings growth, she says. Her earnings-per-share estimate for 2001 is $2.30 to $2.35, and the midpoint of that range is an 11% increase. "That's significant in a year like this when the industry is facing tough conditions," she says. Fine's 12-month target price for the Times is $48. (Merrill Lynch has done no recent underwriting for either Scripps or the New York Times.)

Stock Pick

Favorite stock for next 12 months: Scripps
12-month target price: $75
Comment:
"The Denver joint-operating agreement I mentioned above will help earnings not only this year but for the next two to three years as well. Though it's hard to estimate the Denver portion, I'm forecasting $2.45 EPS for the entire company in the current calendar year; management has guided to a range of $2.45 to $2.65 per share. Last year's EPS was $2.20. Between 20 cents and 40 cents of that increase over 2000 could be from Denver. As for Scripps' cable networks, we're conservatively valuing them at $2.5 billion, or $20 per subscriber."


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Which stock do you like best? Drewry: Gannett Fine: Scripps