Read All About It (DJ, NYT, MNI)

By Stephen Brown | September 28, 2006 AAA

The newspaper business has been in a long-term slump. Advertising revenue – the life blood of the industry – has stagnated for many newspaper publishers and declined for others. Indeed, advertising revenue across the board dropped from $48.6 billion in 2000 to $47.5 billion in 2005, according to the Newspaper Association of America.

Exacerbating matters, competition for advertising dollars is as fierce as ever, especially as internet growth continues unabated. On that front, a recent reported by the Interactive Advertising Bureau and PricewaterhouseCoopers said that internet advertising in the United States totaled $12.5 billion in 2005, a 30% increase from 2004.

But don't count old-school print media out yet; strong franchises exist – Dow Jones Co. (DJ), The New York Times Co. (NYT), and McClatchy Company (MNI) to name three. Yes, this triumvirate is struggling with revenue and earnings growth, but they are also positioned to leverage their respective comparative advantages.

In financial circles, Dow Jones is the preeminent publication. Recently, though, it has been a less-than-preeminent investment, trading at a 20% discount to it's 52-week high. The principal reason: expected higher expenses and lower ad revenue in coming quarters, which recently lead the company to lower its third-quarter earnings guidance from $0.14 per share to a range of $0.08 to $0.11 per share.

Similarly, the New York Times – the preeminent daily – is off 25% from its 52-week highs. Advertising revenue growth remains anemic, particularly in New England (it owns the Boston Globe), where ad revenue fell 15.7% in August, while newspaper advertising revenues were down 5.9% for the month, the biggest drop since the recession of early 2002.

The McClatchy Company is suffering as well. The company owns and publishes daily and non-daily newspapers in four regions: Minnesota, California, the Carolinas, and the Northwest. Its revenues were up a mere 0.5% in the second quarter of 2006 and net income was stagnant compared to the year-ago period. Higher newsprint and stock compensation charges pressured second-quarter margins and will continue to do so over the next couple of quarters. McClatchy is trading at a 35% discount to its 52-week high.

I think the discounts present opportunity, particularly as these companies further expand their online operations. On that front, Dow Jones bolstered its internet presence last year when it acquired MarketWatch – which operates advertising-supported MarketWatch.com and BigCharts.com – for $538 million. Dow Jones is also garnering increased subscription revenues from WSJ.com and Barron's Online, which are virtually costless to deliver on the margin.

Among newspapers, only The New York Times has successfully monetized news content as well as Dow Jones. The company launched New York Times Select in 2005 and is beginning to distinguish itself within the newspaper industry by deriving about 7.7% of overall revenues from its internet operations. To further bolster its internet presence, The Times purchased About.com, a top-10 visited Web site, in 2005.

McClatchy lacks The New York Times and Dow Jones' national internet presence, but it commends a near-monopoly in its regional markets. This presence was vastly expanded last year when McClatchy acquired Knight-Ridder for $6.10 billion. The company now sports 32 daily newspapers and 50 non-dailies with a combined daily circulation of about 3.3 million, making it the second largest newspaper publisher in the U.S.

Another advantage the aforementioned trio possess – and one often overlooked – is quality content. The internet is a vast reservoir of information, to be sure, but it is a vastly polluted reservoir. Content is king and persistent advertising revenue will accrue to companies that consistently provide quality content. Fact is, few companies provide higher-quality content than Dow Jones, The New York Times, and McClatchy, and that just may prove enough to provide quality returns for their shareholders in the long run.

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