By: Jennifer Saba The newly spun-out A.H. Belo has many advantages going for it, including no debt and nicely growing digital properties -- but it still has the mark of a pure-play newspaper company. Which is why Goldman Sachs has initiated coverage of the Dallas-based company with a "neutral" rating.
In a research note to investors released on Thursday, lead analyst Peter Appert wrote that while A.H. Belo's stock is attractive, it's still subject to the forces hitting the industry at large: a cyclical downturn on top of a "painful" secular transition over the next several years.
The note points out that Belo operates newspapers in three "demographically appealing" markets: Dallas, Providence, R.I., and Riverside, Calif. Yet these cities, especially Riverside, are suffering from the sub-prime mess and weakening economic trends.
Goldman Sachs estimates that in 2008, advertising revenue at the company will fall 10% and total revenue will decline 7.5%. Margin pressure will remain since "it's unlikely A.H. Belo can trim expenses enough to fully offset the current pace of revenue decline." What's more, as a small-scale publisher it will be difficult to benefit from strategies employed by its larger peers like geographical clustering.
The company is positioning itself to come out of a tough secular transition, Appert pointed out. Several things are going for A.H. Belo. Most notably, the company is making great strides with its Internet operations and niche publications -- the latter pulls in about 1% of revenue, according to Goldman Sachs estimates -- poised to keep growing.
Online advertising revenue at A.H. Belo has been growing a 32% compound annual growth rate since 2002. Of course, that growth rate will slow over the next five years -- probably more like 15%, Appert projects. By 2012 the online side is forecasted to represent roughly 20% of revenue.
Appert is on the sidelines about the Yahoo alliance mostly because of "limited information" about the partnership outside the HotJobs portion. "The agreement between numerous newspaper companies and Yahoo involves a revenue-share model which we believe could have a meaningful impact on A.H. Belo's online ad revenue growth, but at this point, it is too early to call," wrote Appert.
While these efforts don't yet have the sufficient scale to offset the losses in print, A.H. Belo is heading in the right direction. "We believe it will take at least another two to three years before online revenues reach sufficient scale to have an impact on the company's overall growth rate," Appert wrote.
Appert also mentions that unshackled by debt, the company will have an opportunity to invest its free cash flow in growing Internet operations and also, of course, return it to shareholders. A.H. Belo will pay a quarterly cash dividend of 25 cents per share or $20 million annually, representing 50% to 75% of free cash flow.
Goldman stamped A.H. Belo as "neutral" because of a very challenging industry backdrop, pressure on estimate revisions, and its limited scale.
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