Goldman Sachs Jittery but Upbeat About Knight Ridder Profits

By: E&P Staff After a recent series of meetings with Knight Ridder management, Goldman Sachs yesterday declared that it was "feeling more enthused about the prospects for long-term margin upside, but still nervous about the near-term revenue environment." But while investors "are rightly concerned about the slow pace of the ad recovery, we think they will be surprised on the upside ... as ad revenue growth reaccelerates."

Among positive aspects, Goldman noted the company "remains intensely focused on cost management" and "very focused on leveraging its local and national presence through the Internet..."

But because of its sluggishness in ad revenues it will probably take a few more years for the company to attain its goal of a 25% profit margin, according to the report.

CEO Tony Ridder acknowledged that this aim "will require a better revenue environment than the company is currently seeing" the report said about its visit with Knight Ridder executives. The company hit a margin of 22.7% in 1999 and slipped to 19.3% in 2003.

Knight Ridder pointed to several factors as to why it lags the industry in ad revenue growth (ad revenue for April was up 1.8% versus the industry's gain of 5%). Two markets, San Jose and Philadelphia, bear the brunt of the blame. Both cities are experiencing a weak comeback in help-wanted advertising -- a category where many markets have experienced double-digit growth. Goldman Sachs estimates that San Jose and Philadelphia account for 25% of the Knight Ridder's revenues. The company also cited troubled department stores like Kmart, Dillard, May and Federated for the ad lag.

Knight Ridder may be behind the industry in ad revenues but the company shines when it comes to operating expenses which rose 2.1% versus the industry's 5%. The investment firm credits "aggressive management of headcount, success in controlling healthcare costs, reduced newsprint consumption, and a focus on keeping 'other costs' (everything except labor and newsprint) close to flat."

Goldman Sachs suspects though that Knight Ridder's soft Q2 will drag on EPS estimates. The firm expects $1.06 for Q2 while its full year estimate of $4.05 remains unchanged.