Morningstar: Battered Newspaper Shares Still The 'Market's Most Overvalued Stocks'

By: Mark Fitzgerald
Shares of nearly all publicly traded newspaper companies have lost upwards of 80% of their value in the last year -- but they haven't hit bottom yet, says a blistering report on the sector released Monday by Morningstar.

The Chicago-based independent research firm calls newspapers "the market's most overvalued stocks."

"Such sharp price declines (including a 52% drop for Gannett, an 82% dive for McClatchy, and a 94% loss for rural/suburban publisher GateHouse), coupled with what may be perceived as currently cheap valuation ratios, could be tempting to value-minded investors, but we say, 'Look out below!,'" says the report by Matthew Coffina, with contributions from analyst Tom Corbett.

"We think the stocks have further room to fall, as declining revenues and negative operating leverage combine to create a downward spiral for this moribund industry," Morningstar added.

Morningstar offers the usual reason for its pessimism about newspapers: high fixed costs with "steadily" shrinking revenues are squeezing profits as the Internet steals readership and ad share "at an accelerating pace."

"We don't anticipate these trends to reverse and consider the newspaper industry unattractive as a whole," the report concludes.

Morningstar singles out five newspaper stocks that it says are trading at "significant premiums" to its estimates of their fair value.

Morningstar assigned Gannett a fair value of $12.00 a share. Monday morning, Gannett (NYSE: GCI) was trading at $19.99, off 66 cents, or 3.2% from the opening. Morningstar said it expects the nation's largest newspaper company's revenues to fall at 5% annually over the next five years, with operating income declines averaging 14% annually.

The New York Times Company was given a fair value estimate of $10.00 a share. Monday morning its stock (NYSE:NYT) was trading at $13.94, up 2 cents, or 0.14% from the open.

Lee Enterprises (NYSE: LEE) was trading early Monday at $3.56, down 11 cents, or 3.26%. Morningstar's fair value estimate: $2.00 a share.

Morningstar said The McClatchy Co. stock has a fair value of just $2.00, but Monday its shares (NYSE: MNI) were trading at $4.26, up 7 cents, or 1.67%, from the opening.

"McClatchy doubled down its bet on the future of newspapers with the $4.6 billion acquisition of Knight Ridder in 2006," Morningstar wrote. "The $2.5 billion in extra debt assumed in the deal only exacerbated McClatchy's shaky financial footing. Barely a year passed before McClatchy had to write down $3 billion of the acquisition's purchase price. Another problem in the current environment is McClatchy's outsize exposure to California and Florida, with their floundering housing markets. We expect McClatchy to see 4.7% annual revenue declines over the next five years and only irregular profitability."

Morningstar repeated its judgment that the GateHouse Media Inc. (NYSE: GHS) is essentially worthless, assigning it a fair value of zero. Monday morning it was trading at 69 cents, down 2 cents, or 2.82%.

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This story has been corrected. It reported incorrectly Morningstar's fair value estimates for Gannett, Lee, The New York Times Co., and McClatchy.