Newspaper Stocks Outperform S&P 500

By: Lucia Moses Newspaper CEOs will report their quarterly outlooks at the annual Mid-Year Media Review in New York next week. But one thing is already clear: newspapers may still be climbing out of the hole that is the advertising recession, but investors couldn't love them more right now.

As a group, publicly traded newspaper companies have outperformed the Standard & Poor's 500 Index most of this year, resulting in higher than usual values relative to earnings. Put in English -- the stocks are comparatively pricey.

Newspapers' steady cash-flow generation and speculation about further consolidation among chains could be propping up valuations. Probably the biggest factor is the anticipation of an ad rebound. With their high fixed-cost/low variable-cost structure, newspapers are well-positioned to benefit in a recovery.

""It's your classic early-cycle group,"" said Peter Appert, an analyst with Deutsche Banc Alex. Brown. ""A little bit of revenue improvement comes with a lot of earnings.""

Looking at it another way, however, you might say that already-high valuations means there's little room for improvement. Analysts think that valuations won't get much higher even when earnings start looking better -- and, for now, economists are forecasting only a muted recovery.

And, in a strange way, an unexpectedly robust rebound could have a downside. Since their stock prices already reflect investors' expectations for an ad turnaround, newspapers could lag relative to other businesses. That could drive growth-oriented investors (who see newspapers as safe havens in bad times) to faster-growing sectors.

Additionally, newspapers face challenges next year that they don't have now. Year-over-year ad-revenue comparisons will be less kind than this year, newsprint is likely to get more expensive as demand picks up, and companies with TV holdings (such as Gannett Co. Inc. and Media General Inc.) will suffer the absence of political advertising in a nonelection year. The falloff in recruitment advertising and Internet competition will also continue to haunt newspapers. Said Bear, Stearns & Co. Inc. analyst Kevin Gruneich, ""If you see strong growth in the economy, it's not going to be as good for newspapers as other sectors.""

2002 Newspaper Company
Stock Price Performance Versus S&P 500 Index (Jan. 2-June 6)
Up/(Down)

S&P 500 Index(10.36%)
McClatchy Co.36.71%
Tribune Co.16.82%
Gannett Co. Inc.14.29%
New York Times Co.13.64%
Washington Post Co.13.44%
E.W. Scripps Co.13.11%
Knight Ridder0.17%
Hollinger International Inc.(0.43%)
Journal Register Co.(1.29%)
Dow Jones & Co. Inc.(1.69%)
Lee Enterprises Inc.(2.36%)
Pulitzer Inc.(5.72%)

Source: E&P calculations based on Yahoo!Finance data