Newspaper publishers will deliver their final dispatch for the third-quarter earnings season Thursday, with reports due from The New York Times (NYT) - Get New York Times Company Class A Report, Belo (BLC) and Tribune( TRB).
So far, results from the sector have amounted to a jumble of restructuring charges and red ink as the newspaper business continues to grapple with higher costs, lower ad revenues and circulation, and the dramatic changes in the way consumers are digesting information in the digital age.
Thursday is expected to be no different, as The New York Times and Belo each warned last month that earnings would be weak.
Such warnings have been commonplace at newsprint purveyors, and John Miller, portfolio manager with Ariel Capital, says he has never seen such negative sentiment on Wall Street about the business. For that reason, he sees opportunities to find long-term value in the sector as investors flee the scene.
"The dominance that newspapers possess in local markets thanks to the relationships they've built with consumers for centuries is hard to replicate," says Miller, whose firm is one of Tribune's largest institutional holders.
"There's a transformation taking place in the industry, and ad dollars have moved away towards new media, but some of it will come back," he adds. "And in terms of traffic, newspaper sites still dominate the Web for local information. Investors need to stop viewing these companies as newspaper businesses and start viewing them as information providers."
According to Morningstar, newspaper stocks are undervalued. The research firm says shares of New York Times are worth $33, while the stock market currently values them at $23.08. It says shares of
( DJ) are worth $36, while the stock changes hands now at $33.80. For Tribune, Morningstar estimates shares are worth $50, a steep premium to its current market price of $33.03.
Miller points to
( JRC), which operates 27 daily papers in the U.S. and a number of non-dailies, as evidence of the value that can ultimately be realized by newspaper stocks at these levels.
Last week, shares of Journal Register were trading at $5.78, down 59% since the beginning of 2006. On Thursday, it reported a 37% drop in third-quarter profits, but the results met Wall Street's expectations.
Merrill Lynch analyst Stacy Fleck upgraded the stock to neutral after the company's earnings call, saying its dismal performance was priced into the stock, and she sees "intensified efforts on behalf of management to help offset the revenue pressure." This week, the shares were recently trading at $7.30, marking a 27% return in just seven days.
Of course, such short-term gains are far from guaranteed at companies reporting Thursday.
On Wednesday, shares of Dow Jones, which publishes
The Wall Street Journal
, dropped after the financial news concern said third-quarter earnings slipped 6% to $9.4 million, or 11 cents a share, excluding a tax gain and a severance charge.
The results beat analysts' expectations for earnings of 10 cents a share, according to Thomson First Call. But shares of Dow Jones were recently down 79 cents, or 2.3%, to $33.57 after the company said it will buy Reuters' 50% stake in news database Factiva for $160 million.
, owner of
and 89 other daily U.S. newspapers, reported a 12% decline in third-quarter earnings. Shares of Gannett, widely viewed as an industry bellwether, slumped after the company said September ad revenue declined 3.9%, indicating further softening in the market.
But last week's reversal of fortune at Journal Register illustrates what can happen to stocks that are trading at bargain basement prices. Shares of New York Times are down about 15% this year, as the company has been particularly hurt by dropoffs in revenue from
The Boston Globe
It expects to earn 8 cents to 10 cents a share for the quarter, compared with 16 cents a share in the same quarter last year. The estimate includes costs for job cuts and the sale of its stake in the cable network Discovery Times Channel.
On Wednesday, JPMorgan analyst Frederick Searby downgraded shares of New York Times to underweight from neutral, saying he believes the company will face "incremental challenges to its core business" for the next six months.
"We believe the only way for newspaper publishers to deliver outsized returns in the near-term is through favorable M&A transactions," Searby wrote in a note to clients. He said he can't totally discount a going-private deal for New York Times, but it's "one of the least likely newspaper publishers to be taken private given its dual share structure."
A trust set up by the members of the Sulzberger family, which owned the company before it went public, controls New York Times through a separate class of voting stock that isn't publicly traded. Such an arrangement, however, does not exist at Tribune, where speculation of a leverage buyout or some other financial transaction is running rampant.
Analysts expect Tribune, which owns
The Chicago Tribune
The Los Angeles Times
, to report earnings of 45 cents a share for the quarter, down from last year's 50 cents a share. The company has had a particularly turbulent year. Its largest shareholder, the Chandler family, called publicly on Tribune last summer to either break up or be sold, threatening to wage a proxy fight aimed at ousting the company's management.
Tribune's board agreed last month to explore strategic alternatives. A decision is expected by the end of the year, and investors will be listening Thursday for any developments.
While a sale of the company may be unlikely for the Times, the Old Gray Lady is planning to divest its broadcast media group, which includes nine network-affiliated television stations, in an effort to allow management to focus on its newspapers and digital media businesses. Dow Jones is selling a number of community newspapers, and more asset divestitures are expected from newspaper players.
The wave of asset sales follows
sale of 12 newspapers it acquired in a deal to buy Knight-Ridder that closed in June. Shares of McClatchy, which paid Knight-Ridder shareholders for their company with a mix of cash and stock, are down 29% since the acquisition.
On Tuesday, McClatchy reported that its third-quarter earnings rose 34%, thanks to the acquisition, but on a pro forma basis, its revenue was down 1.4%. Advertising revenue dropped 0.8%, and circulation revenue fell 4.2%.
Edward Atorino, analyst with the Benchmark Company, says that the rise of the Internet isn't the main factor weighing on newspapers. He says the ad market in general is not enjoying the fruits of the economic recovery, as giant retail mergers and cutbacks in the auto industry have resulted in fewer ads.
A disappointing year for the film and entertainment industry also has hurt ad spending, and the housing slowdown is affecting the real estate ad market.
"Advertising hasn't been doing what it's supposed to do in an economic recovery, but this can't go on forever," says Atorino. "If the fourth quarter brings any kind of improvement, some newspaper stocks could be attractive because their valuations are at five-year lows by any metric you want use."
One positive catalyst could be a respite in the steady climb of newsprint costs for newspapers. Journal Register CEO Robert Jelenic told analysts last week that he sees costs declining in 2007.
"It looks like maybe the tides have turned," Jelenic said. "That would be very beneficial for us, and the rest of the industry."
Those comments echoed similar sentiments from Gannett and
on their conference calls.
"These companies are in a tough time of transition," says James Goss, analyst with Barrington Research. "After it all sorts out and the market eventually improves, they should be in a good position, but it's the transition that is difficult."