| * data as of 8/23/05 |
| Source: Thomson/Baseline|
NEW YORK (CNN/Money) – Extra! Extra! Read all about it! Newspaper stocks have been lousy investments!
The industry of the ink-stained wretch has been derided for being unglamorous in an age where online job sites and blogs are stealing advertisers and readers. And this skepticism has hit the shares of most of the large publishers.
On average, the 14 newspaper stocks with a market value of at least $500 million are down 9 percent in 2005, according to data from financial database Thomson/Baseline.
And some of the most well-known companies have really taken it on the chin.
Shares of Washington Post Co (Research). have fallen about 17 percent while shares of the New York Times Co (Research)., the industry's so-called Gray Lady, have plunged more than 20 percent.
But here's a news flash. Some fund managers think that the overwhelming pessimism has created some compelling bargains in the sector.
"The valuations of newspaper stocks have become exceptionally attractive because the outlook on these companies has become particularly negative," said Wendell Perkins, portfolio manager with Johnson Asset Management, which owns USA Today publisher Gannett (Research) in the JohnsonFamily Large Cap Value fund and Milwaukee-based Journal Communications (Research) in the JohnsonFamily Small Cap Value fund.
To that end, Gannett trades at just 13 times 2006 earnings estimates and earnings are expected to increase by 10 percent next year. Journal Communication has a P/E of about 18 and analysts are predicting a profit increase of 15 percent in 2006.
In addition, legendary value investor Warren Buffett is a fan of the group. His Berkshire Hathaway (Research) investment firm is the largest institutional owner of Washington Post and it also owns a stake in Gannett.
Buybacks and online growth could buoy the sector
Plus, the industry may get a little more exciting in the next few months.
Earlier this month, Knight-Ridder (Research), one of the largest publishers in the U.S., announced that it had repurchased 5 million shares in a planned 10 million share buyback program. This move was viewed by some as a sign of confidence since it showed a willingness to spend money at a time when sentiment on Wall Street is weak.
"It's good that management is not going into a shell and saying they want to preserve cash for the rainiest of rainy days since it is already rainy," said Alex Vallecillo, co-manager of the Allegiant Mid Cap Value fund, which owns Knight-Ridder.
What's more, Gannett, the country's largest newspaper firm, said earlier this month that demand for local advertising increased in July and that it expected overall newspaper ad revenue to be up in the mid-single digits for the second half of the year.
The industry is also slowly starting to capitalize on the surge in online advertising. According to figures released Monday by the Newspaper Association of America (NAA), an industry trade organization, online ad growth at newspapers in the second quarter increased 28.6 percent from a year ago. "Newspaper sites continue to rank at the top of the most visited online news sources in the nation. The significant growth in online ad spending is recognition of newspapers' leadership position on the Web," said John F. Sturm, president and CEO of the NAA in a statement.
That's obviously good news. But online advertising is still a tiny fraction of overall ad revenue for newspapers, accounting for 4 percent of total ad sales.
Mergers on the horizon?
Burt perhaps the biggest reason for excitement in the group is the possibility of mergers. Dow Jones (Research), the publisher of the Wall Street Journal, has been the subject of several takeover rumors lately, fueling speculation that there could be some much-needed consolidation in the sector.
Perkins said investors shouldn't buy newspaper stocks solely because of takeover speculation but he added that he would not be surprised if there were some mergers in the industry. And that wouldn't be a bad thing.
"That could perk up the stocks," he said, adding that Tribune (Research), which has been mired in a scandal regarding inflated circulation figures at several at its papers, is an intriguing acquisition target.
Vallecillo also said that consolidation would not be a surprise. He thinks that a wave of deals in industries that are known for relying heavily on newspaper ads, such as retailers and wireless phone companies, could lead to a short-term pullback in ad spending. In addition, there is legitimate reason to fear that demand for housing ads would fall sharply if the real estate market, as many expect, cools off. And more ad-related woes could be a spark to drive newspaper mergers.
"Consolidation is usually the knee-jerk response to a slowdown," he said. "You may see a deal or two." In fact, there already has been one newspaper merger this year, with Lee Enterprises (Research) buying Pulitzer for about $1.5 billion.
The only issue is that with the stocks of many newspaper companies hovering near their 52-week lows, Vallecillo's not sure how many more companies would be willing to sell out at such discounted prices. So investors need to be selective when looking at the newspaper group.
For a look at more publishing stocks, click here.
To read about how "old" media companies are wooing advertisers, click here.