(MONEY Magazine) – Newspapers seem forever on the ropes. First attacked by radio, then TV, the stodgy old industry has been fighting off death for decades. Now, thanks to the Internet, newspaper publishers are back on the endangered species list. Can they survive in the so-called New Economy?

Recent signs haven't been encouraging. Last year, Standard & Poor's newspaper index soared 28.1%--but this year, the index has dropped 12%. Why? For starters, rising interest rates could slow down the economy and halt ad spending, which accounts for as much as 80% of newspapers' revenues. In addition, newsprint prices should rise 4% to 6% this year, no small deal considering that paper is the second biggest cost for newspapers after labor and accounts for up to 25% of operating costs. Then there's the threat of the Net.

And yet, newspapers' ad sales in-creased for the eighth year in a row, gaining a healthy 5.4% to reach $46.3 billion despite an onslaught of competition. Ironically, a sizable chunk of that gain came from advertising bought by the industry's dotcom rivals.

We believe that the industry's long-term prospects look bright. Independent newspaper analyst John Morton, in Silver Spring, Md., points out that newspapers still capture nearly one-half of all local advertising revenues and about one-fifth of total advertising. They're also still very profitable: Last year the average operating margin for the industry was more than twice the average for all U.S. industry, Morton says. Newspapers are also the businesses best structured to gather local news economically, he adds, and other media outlets, including websites, depend on them as a resource. That's an advantage that can be leveraged.

Of course, newspapers still face challenges. Newspapers' print circulation has been steadily declining--the nearly 1,500 newspapers in the U.S. reach about 56 million people daily, a drop of about 10% since 1980--and they want to make up some of that lost readership online. The Wall Street Journal's online edition, published by Dow Jones, provides hope: It has more than 440,000 paid subscribers (Journal subscribers pay $29 a year; others, $59) and is gaining thousands more monthly. Gannett, the nation's largest newspaper publisher, says that all of its 15 websites--including www.usatoday.com, the most visited newspaper site--sold enough ads to make a profit in 1999. Three more websites it launched this year are already in the black.

Other companies, like Knight Ridder, Tribune, Washington Post and New York Times, have centralized their Internet efforts in discrete units. All four boast strong enough brands to spin off these units as separate stocks, says Charlene Li, an analyst at Forrester Research in Boston. But Li believes that the companies would be better off hanging on to their Internet divisions: "Their revenues are still pretty small compared with those of online competitors like America Online and Yahoo!," she says.

All said, newspapers aren't incredibly exciting as investments. But they are consistent, fairly predictable businesses that tend to increase their earnings each year, which makes them a good choice for some of the money you may be moving out of the volatile tech sector. "These are not the kind of stocks that shoot up 10 points in a day," says Howard Ward, portfolio manager of the $3.5 billion in assets Gabelli Growth Fund. Ward argues that many newspaper stocks provide great long-term value (five of his fund's 55 holdings are newspaper stocks). "Everyone has been so focused on the short term that, to a degree, these stocks haven't gotten the attention they deserve," he says. According to Baseline, newspaper-company earnings should grow, on average, about 12% a year going forward--less than half the 25% they enjoyed during the past five boom years, but still a healthy rate.

We have selected three newspaper stocks that are well positioned for growth and are reasonably valued.

Chicago-based Tribune Co. has the highest price/earnings ratio of the three stocks. But it's also the most profitable, with an EBITDA margin of 41.1% over the past five years, compared with the industry's 25.4% average. (Analysts frequently use EBITDA, which means earnings before deducting interest, taxes, depreciation and amortization of good will, to evaluate media companies.)

Skeptics view Tribune's $8 billion proposed acquisition of Times Mirror in March as a marriage of Old Economy dinosaurs. We disagree. By combining the two companies' 20 magazines and 11 daily newspapers--including one in each of the three biggest U.S. markets--with their TV and radio stations and websites, Tribune CEO John Madigan will be able to build a multimedia behemoth that stretches coast to coast. "This is an ideal merging of media--not old or new media, just media," says CIBC World Markets analyst Rudolf Hokanson. The merged company will also be ahead of the Internet curve: Already, 3.4 million people a month visit the two companies' websites. Separately, Tribune and Times Mirror grew their earnings at 16% and 35% a year, respectively, over the past five years; future earnings growth is predicted to be 13% and 11% a year.

And yet, in late April, Tribune was trading at $40, 34% off its 52-week high. Doug Eby, co-manager of the $1.8 billion in assets Torray Fund, says the battered price reflects investors' short-term focus on earnings over the strategic value of the merger. Eby took a 3% position in Tribune following the merger announcement.

If you're looking for a blue-chip newspaper stock, New York Times is it. The company has one of the strongest brand names in the business and is in the process of taking its flagship paper national, turning it into an upscale USA Today. Earnings grew at an average annual rate of 24% over the past five years and are predicted to grow at a 12% annual pace in the future.

The company announced in February that it was selling seven small regional papers to focus on building its national rate base and its Internet division, called New York Times Digital. Revenue at the digital unit more than tripled in the first quarter of this year to $11.6 million, while losses almost doubled to $10 million. The company is considering spinning off the unit this summer, should market conditions allow, pending a shareholder vote at the May annual meeting. The stock was recently trading at about $41.25, down roughly 17% from its 52-week high.

San Jose-based Knight Ridder--the nation's second largest newspaper publisher--is the blue-light special of newspaper stocks. It's also one of the purest plays, with no TV or radio properties. At a recent $47.75, the stock is 26% off its 52-week high. Coming off a record-breaking 1999 and a strong first quarter in 2000, the company trades at just 13.2 times estimated 2000 earnings, well below the industry average of 20.6. Earnings have grown 24% a year over the past five years and are projected to climb 12% a year for the next five. "This is a good, strong company that is terribly undervalued right now," says Credit Suisse First Boston analyst Steven Barlow. Knight Ridder has 31 dailies, including the Philadelphia Inquirer and the Miami Herald, plus an Internet division called KnightRidder.com.

--JEFF NASH