TSC 21: Is Recovery on the Fall Lineup at Belo? - TheStreet

Thanks to a late-June warning, TV and print media company



second-quarter earnings report Friday will feel a lot like a rerun. But what the company says about the fall lineup -- recovery or sluggish economy -- is what Wall Street is tuning in to hear.

Back in late June, Belo warned that second-quarter results would come in lower than year-ago levels, missing Wall Street's estimate of 36 cents a share. Because of this, nearly everyone on Wall Street expects the company to earn 33 cents a share.

"Whatever they said when they preannounced is what I'm looking for," said David Goldsmith, equity analyst at Buckingham Research Group. "It's going to be very mundane."

But while some analysts expect the expected, investors who are buying into cyclical newspaper stocks like Belo on the presumption that the economy will recover in the second half should scrutinize company comments and current trends. While the company didn't give guidance in its first-quarter call, management is very clear with investors about where business stands and may guide earnings if visibility looks good.

"It's an ad-driven business and a lot of people are hoping for a cyclical recovery in newspaper advertising -- that's what we're looking for in Belo," said George Smith, equity analyst at Davenport. "Just signs of a recovery, not necessarily robust improvement."

For the last few years, advertising revenue has recovered from horrid levels only to continue dragging along the bottom. And it is extremely unlikely that Belo will show robust improvement in advertising.

When the company warned on June 24, it said that June revenue trends continued to be weak in the wake of the second Gulf War, similar to April and May. But the company did say that July revenue for its TV unit was stronger than the previous two months, and that July newspaper ad revenue would be stronger as well, with an increase in the low-single digits.

Because so much is known about results for Belo's April, May and June, those July figures take on a greater importance. In his second-quarter preview of newspaper earnings, William Drewry, analyst at Credit Suisse First Boston, summed it up best by saying, "It's all about the ad momentum."

"Based on management comments at midyear and May ad trends, advertising momentum is re-emerging, but we don't expect any major re-acceleration until post-Labor Day," said Drewry in his note. "And if ad momentum does not pick up meaningfully until then, we believe 2003 could be a virtual replay of last year."

As the chart below indicates, year-over-year monthly comparisons for newspaper ad revenues have been showing marginal to moderate improvement. Some, like Drewry, believe that once businesses start hiring again, the pickup in high-margin help-wanted advertisements can boost earnings and fuel a recovery in 2004.

But with many economists -- and recently Federal Reserve Governor Ben Bernanke -- saying the economic recovery will be a jobless one, any pickup in help-wanted advertisement revenue should be considered gravy. Even Dallas-based Belo doesn't think want ads are going to rebound, with CEO Robert Decherd saying "we believe that unlike the last three recessions, employment is not going to lead us out of this one" at a question-and-answer session when giving its midyear results.

Outside of ad revenue, investors should keep a close eye on expenses because nearly all of these newspaper companies face not only the rising cost of newsprint, but also rising medical and pension costs for employees. In order to take full advantage of the hypothetical ad recovery, look for companies to address this important issue, given that newsprint prices are expected to increase 10% in 2003.

Companies could get a boost from political advertising heading into the 2004 presidential election. While it's impossible to predict how candidates will spend their money, look for analysts to ask questions about this potentially lucrative part of the business.

Ultimately, investors already know what Belo has to say about its second quarter, thanks to that June preannouncement. But for bulls who believe that the second-half economic recovery is for real this year, analysts say that now is the time to buy into a cyclical rebound before stocks get pricey. Belo's stock is up 6.9% so far this year, trailing the

S&P 500

and many industry peers. However, its shares also posted high-teen percentage point gains in 2001 and 2002.

"Investors seem to be waiting on the sidelines to determine whether to be more aggressive buyers, possibly awaiting a number of economic data points," said Michael Kupinski, equity analyst at A.G. Edwards, in a note. "We encourage investors to be aggressive in advance of the second-quarter reports, even though they will likely be disappointing."