Editor's note: The "Should I Do It?" column runs every Wednesday and is written by David Peltier, our value stocks expert. In the column, David takes a look at a value stock and explains if you should snap up shares or pass it over.Peltier is a regular on RealMoney and also writes TheStreet.com Value Investor.
The newspaper sector has been one of the real battlegrounds in value investing lately.
On the one hand, these companies boast hard assets and popular brands, but on the other, they face heavy competition from the Internet advertising sector for classified and display advertising. And to see the effect this battle has had on the group, take a look at
( DJ), which at Tuesday's closing price of $38.93 a share, was down 50% from its 2000 highs.
That's a big discount for a 120-year-old company that owns and operates
The Wall Street Journal
, a top news wire and a lucrative index licensing division; shares of Dow Jones have bounced back 9% in the early days of 2006, thanks, in part, to the Jan. 3 announcement that Richard Zannino will become the company's new CEO. The stock also benefited when Goldman Sachs analyst Peter Appert upgraded the company Tuesday to in line from underperform.
Even so, the important question is: Going forward, does Dow Jones hold value?
Let's start with the management. Zannino has been the company's COO for the past three years, and his replacement of Peter Kann as CEO marks the first time in more than a century that a journalist has not been at the helm of the company. In addition to showing that the company is serious about getting its business in order, the other message this move sends is that the Bancroft family, which controls a majority of Dow Jones' voting power, are in no rush to sell the business.
( KRI) and Dow Jones are just two of several newspaper players that have been rumored to be takeover targets in recent months, and this move by the Bancrofts indicates that they see value in the business.
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Industry in Decline?
So how about the industry?
One positive trend for Dow Jones is the increasing mix of revenue coming from electronic publishing. Including the January 2005 purchase of Marketwatch, Goldman's Appert said the group will count for about 30% of annual revenue, but at least half of the company's overall earnings.
This trend doesn't just affect Dow Jones, however, which makes electronic growth a double-edged sword for the company. According to a Morgan Stanley research report published last September, online advertising was just 2.4% of overall ad spending in 2004, while newspapers accounted for 11.4% of the total. Anecdotally, I'm sure that gap narrowed during 2005, and that's just using the announcements from heavy advertisers like
Procter & Gamble
during the "upfront" season when they heavily cut their planned spend on traditional advertising.
But another area where the print publications will run into trouble is the classified market, which accounted for another 4% of ad spending in 2004. The increased ramp in traffic to popular sites like
and craigslist.com are directly taking Classified business away from the print publishers. Plus, the online operations are far less capital-intensive.
Dow Jones is scheduled to post fourth-quarter earnings on the morning of Jan. 26. Management said earlier in the year that results would come in at the high end of expectations, led by a strong performance at both the print and the online versions of
The Wall Street Journal
. The consensus analyst estimate is for the company to have a profit of 40 cents a share on $480.7 million of revenue, which is about equal to its performance in the fourth quarter of 2004. That would mark the sixth straight quarter that Dow Jones reported flat or lower earnings, relative to the previous year.
Dow Jones shares appear expensive, trading at 33 times expected 2006 earnings of $1.17 a share. In my opinion, that is not sufficient profit to cover the company's 25-cent quarterly dividend. But when you dig below the surface, you'll find that Dow Jones' operating cash flow was 3.9 times greater than net income over the past four quarters. In general, I look for at least two times earnings coverage before I consider a payment secure. It's also worth noting that the company maintains an A-rated balance sheet, making the payment appear sustainable for the time being.
While this adjustment boosts the company's cash earnings, it does not make Dow Jones shares appear any less expensive relative to their peers. On an EV/EBITDA basis, the company's enterprise value is trading at 13.1 times expected earnings before interest, taxes, depreciation and amortization, compared with an average of 10.2 for the company's peers, according to Bloomberg.
So, does Dow Jones hold value for investors at Tuesday's closing price?
Potentially, but I would not pay up for the stock at the current price, particularly following a 19% rally from the October lows. Zannino still has much to prove to investors, including whether recent initiatives like a weekend edition of the
and a new subscription model for Barron's Online will be successful. With that in mind, I don't believe the company deserves a premium valuation, and value-hunters should focus their efforts elsewhere.
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David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;
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