Contrarian bet: Value investors nibble on newspapers
Investors continue to shun newspaper stocks despite the possibility of more newspaper mergers and growth online.
NEW YORK (CNNMoney.com) – Old newspapers are often used for some rather unpleasant tasks.
You can wrap stinky fish in them. You can use them to line the bottom of a bird cage. Or you can bring a paper along with you when you're walking your dog and use it as a makeshift pooper scooper.
These days, Wall Street seems to be treating the stocks of major newspaper publishers pretty much the same way -- ancient relics whose best times have passed and are now only good for disposing waste.
Shares of a dozen top newspaper publishers are down 7 percent, on average, so far this year. And that's despite the fact that a major deal was announced in the sector – McClatchy (Research) agreed last month to buy Knight-Ridder (Research) for $4.5 billion.
The newspaper industry has taken a hit due to several concerns. But the most notable is that readers are increasingly finding other sources for news, such as the Internet, and that advertisers are following readers online. So it's a double dose of bad news: declining circulation revenue and sluggish ad sales.
As such, there's not much excitement about upcoming first-quarter earnings reports due next week. Gannett (Research), Media General (Research), New York Times (Research) and Tribune (Research) are all expected to post year-over-year profit declines.
The dozen top newspaper stocks are expected to report anemic earnings gains of just 4 percent, on average, this year.
This just in...newspapers aren't dead
Still, some think that the time is right for investors to take a chance on the industry.
James Goss, an analyst with Barrington Research, thinks some of the pessimism is overdone. In particular, he thinks that even if print circulation continues to decline, the better newspaper firms should be able to hold onto old readers and possibly gain new ones through their web sites.
"There's no shortage of negatives in terms of the overall trends for newspapers. But it's also not a fall off the cliff," Goss said. "I am not throwing in the towel on publishers. The online environment is theirs to lose."
Goss adds that it's not as if the newspaper companies have avoided the Internet. He points out that CareerBuilder.com, the online job recruitment service owned by Gannett, Tribune and Knight-Ridder, is rapidly growing.
And James Peters, an analyst with Standard & Poor's, said that the acquisition of online information service About.com by the New York Times last year was a wise strategic move.
Edward Maraccini, a portfolio manager with mutual fund firm Jonhson Asset Management, adds that the doom and gloom about the future of newspapers is precisely the reason why he thinks several of the stocks are good buys now.
"We like that there's negativity. Not a lot of people are buying them which makes them a better value," he said. His firm owns Gannett in the JohnsonFamily Large Cap Value fund and Media General and Journal Communications (Research) in the JohnsonFamily Small Cap Value fund.
Those three stocks trade in a range of about 12 to 14 times 2006 earnings estimates, a reasonable valuation considering that they are all expected to post annual profit increases of about 8 percent a year for the next few years.
Maraccini adds that investors are not giving enough credit to newspaper publishers for the steps they've taken to cut costs and reduce debt over the past few years. Because of improved balance sheets, he thinks that newspaper companies should be able to raise their dividends as well as increase share buybacks in order to boost earnings.
More deals in the future?
There's also the consolidation issue.
Peters points out that newspaper companies have tended to be less inclined to sell out because many of them are family run. As such, small groups of shareholders tend to have controlling interest in the publishing stocks.
But Peters thinks the Knight-Ridder deal does prove that there is value in the sector and that if stock prices start to improve a bit, other publishers might be more inclined to do a deal. Several firms, such as Tribune, Dow Jones and New York Times, have often been the subject of takeover speculation.
"There are compelling reasons why there should be additional consolidation," said Peters. "But with valuations at multi-year lows, it's reasonable for companies to go it alone."
Maraccini said investors shouldn't be buying newspaper firms just because of takeover talk. But it obviously doesn't hurt that there could be more deals ahead.
"We're not investing in newspapers because of consolidation but it would be a bonus if more mergers happened," he said.
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Barrington's Goss owns shares of Tribune but his firm does not do investment banking for any of the companies mentioned. Peters does not own any shares of companies mentioned and his firm has no banking ties to the companies.