Robust Profits, Sagging Stock Prices   

Why is Wall Street punishing newspaper companies?

A QUESTION CONCERNED JOURNALISTS have asked of me recently is why, with newspapers selling for such high prices and with newspaper earnings soaring, have the stocks of publicly traded newspaper companies tanked so far this year?
The answer involves Wall Street's overemphasis on short-term expectations, a situation that has a profound impact on newspaper-company operations, sometimes to their detriment.
But first a few facts. A composite of newspaper stocks that I maintain has dropped 17 percent this year, after rising 18 percent during 1999. The composite index of all stocks traded on the New York Stock Exchange rose 3 percent over roughly the same period. (It rose 9 percent last year.)
The principal reason that newspaper stocks did so well last year was that advertising performance was in crescendo while newspaper costs were in diminuendo. The happy combination of higher revenue and lower costs propelled newspaper companies' earnings per share to a 16 percent gain over 1998.
The companies that showed the strongest earnings growth in 1999 were those that are pure, or nearly pure, newspaper companies. Companies with substantial investments in local television stations had their earnings blunted by the so-called "picket fence" syndrome, in which television benefits handsomely in even years from advertising generated by the Olympics and political campaigns and suffer from the lack of these events in the odd years. But even these companies did well, thanks to strong newspaper earnings; newspaper operations alone at all of the companies rose more than 22 percent last year.
Bolstering last year's euphoria about newspapers were exceptionally high prices paid to acquire newspapers in, among other places, Worcester, Massachusetts; Bloomington, Illinois; and San Francisco.
Turn now to this year. The major concern for Wall Street was that, with newspapers riding so high last year, it would be difficult to show strong year-over-year gains. In effect, newspaper-dominated companies were being penalized precisely because they did so well in 1999.
Feeding the concern was a somewhat slowing economy, which ordinarily would blunt advertising-revenue growth (so far it hasn't). Also, newsprint prices rose $50 a ton last April and are scheduled to go up another $50 this fall.
A flaw in this line of Wall Street reasoning so far is that through the first six months of this year, newspaper-dominated companies have confounded expectations with continuing strong earnings growth.
Earnings per share for these companies rose 17 percent on average, and if you remove from the equation the poor results of two companies laboring under special circumstances, the average shoots up to 24 percent. (The two companies are Hollinger International, which has sold off numerous newspapers, and the Washington Post Co., whose earnings were knocked down by substantial investments in Internet-related and other businesses.)
Still, it remains true that comparisons with last year's numbers will become increasingly challenging as the year wears on, and that earnings growth is not likely to be nearly so ebullient in the last half of the year as it was in the first. Thus newspaper stocks continue to be punished, even though average earnings growth for the year likely will come close to last year's.
Another factor that probably is weakening newspaper stocks is the dichotomy in the stock market's view of "old economy" and "new economy" companies. The Dow Jones industrial index, which is dominated by old-economy stocks, is down 3 percent this year. The Nasdaq 100, an index dominated by new-economy stocks, is up more than 5 percent. Newspaper companies, despite their substantial investments in Internet operations, definitely fall under the old-economy umbrella and likely will remain there until (if ever) online operations become major engines of earnings growth.
In the past, when publicly owned newspaper companies were confronted with sagging stock prices, the declines were associated with falling earnings. Many companies responded with what I considered to be excessive cost-cutting that threatened product quality and service to readers and advertisers. This time, with profits robust, there is little evidence of budget-trimming beyond the ongoing emphasis on profit-margin improvement that has become standard practice for almost all newspaper companies in this profit-driven era.
Indeed, newspaper companies are investing heavily in acquiring more newspapers, and publicly owned companies are buying up their own stocks with the conviction that, at current low prices, this is the best investment available.