Newspaper stocks lag Dow p.8

By: Steve Yahn Slowing ad growth, competition from Internet cool investors' ardor

With some exceptions, stocks of publicly traded newspaper companies have not participated in the market's spirited first-quarter gains.
As the bellwether Dow Jones Industrial Average crossed the historic 10,000 divide, and the S&P 500 reached record levels, newspaper stocks by and large were lackluster performers.
"These are consumer cyclicals that track revenue trends, and our forecast is for a continuing slowdown in growth rates," says Michael Kupinski, vice president and senior media analyst at A.G. Edwards & Sons in St. Louis. "We're looking at a first-quarter growth rate of around 2.5% vs. 10% in the same period last year."
Kupinski sees an even slower growth rate for the economy in the second half, at around 1.5% to 2%. Classified advertising, especially recruitment classifieds, are likely to be hard hit. "Businesses are cutting back their hiring plans," he says.
All in all, this is probably not the time to be buying newspaper stocks, notes Kupinski. But there could be some encouraging earnings reports, he adds. "Newsprint prices have been weak, down 6.5% since the start of the year. So there could be some earnings surprises."
Above-average performers are likely to include Gannett Co., the Tribune Co., and Pulitzer Inc., says Kupinski.
Newspaper stocks haven't returned to their peak in the summer of 1998, says Steven N. Barlow, vice president at Credit Suisse First Boston. "Our view is that the underlying fundamentals of the market remain firm: consumer confidence is high, unemployment is low, and interest rates are low. The economy is still healthy," says Barlow.
"Advertising revenue in the newspaper industry is growing, but at a slower rate than last year, and that is affecting investors' interest in newspaper stocks as a group," he adds. "But offsetting that should be declines in newsprint prices and a continuing focus on other expenses, including labor costs."
On the "concerns" list, Barlow puts the potential effect of the Internet on ad revenue that traditionally went to newspapers.
"Help wanted advertising in particular will migrate away from print products," says Barlow. "Granted, newspapers increasingly are heavily invested in Internet activity in attempting to protect their franchise. But investors are being cautious because of the potential adverse effect."
Money manager Sharon Kalin, president of New York-based Athene Coronado Management Corp., echoes Barlow.
"Newspaper companies are of course involved in the Internet," she says. "Unfortunately, in the minds of many investors, they are strictly newsprint stocks." An exception, she notes, is the Tribune Co.
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