These Papers Could Really Deliver

The latest headlines from newspaper companies might make investors cringe. Not just reports of weak gains in ad sales but also of higher newsprint costs and, worse yet, frauds in circulation. Even as 7 of 10 companies in the Standard & Poor's 500-stock index rose in the past year, all five of the list's press stocks sank.

To me, that spells opportunity. It's not that the industry's challenges, including online rivals, are suddenly going to evaporate. But after checking their current positions and prospects, such stalwarts as Gannett (GCI) (a negative 7.2% return in 2004), Knight-Ridder (KRI) (off 11.8%), and Tribune (TRB) (off 17.5%) strike me as poised to deliver better days to investors.

My reasons start with the balance sheets. Gannett, for example, ended 2004 with some $4.9 billion in long-term debt -- a manageable 38% of total capital, down from more than 50% in 2000. Operating profit covers interest expense 16 times over. These companies are also repositories of hidden values: In 1981, Tribune paid $20.5 million for the Chicago Cubs and its prime Wrigley Field real estate. Today the team might fetch 20 times more, given that Major League Baseball aims to sell its failed Montreal franchise, soon to reappear as the Washington Nationals, for an estimated $300 million, no real estate included. On Knight-Ridder's list of assets is some long-held land in Miami that had been used as a parking lot. It's now up for sale, and the company expects to see a $150 million gain.

TO WATCH THESE STOCKS' recent performance, you might expect that the companies had been losing money. Not so. All are set to report higher profits in late January and look forward to more gains this year. Their cash flows also remain so healthy that directors have the happy problem of deciding how much to devote to paying off debt, buying back shares, or raising dividends. In the past year, each of the companies hiked payouts by 7.8% or more. One reason for their strong free cash flows is their discipline in capital expenditures. Gannett's 2005 capital budget is level with last year's, while Tribune expects only a slight rise. Knight-Ridder sees its capital spending actually declining by 22%.

The knock on the stocks has been their tepid expectations for growth -- only 5% to 7%. That said, the surprise would probably be on the upside if the economy, particularly hiring, picks up steam. Through their classified listings -- both in print and on the Net, where Tribune collects 16% of its recruitment-ad revenues -- all three companies would benefit. Meantime, they have operating costs well under control. Knight-Ridder, for instance, notes that California's Santa Clara County, home to its Mercury-News in San Jose, still suffers from the bust of the Silicon Valley economy, having lost one job in five since 2000. The Merc, however, has cut its full-time staff 22%.

A wildly bullish picture? No, but the market is valuing the stocks at a modest 10 times estimates of 2005 earnings before interest, taxes, depreciation, and amortization (EBITDA). Pulitzer (PTZ), which is exploring a possible sale of the company, now goes for 13 to 14 times estimated EBITDA. One danger: Gannett has expressed interest in Pulitzer, based in St. Louis. If it makes a deal, uncertainty over the ultimate payoff could weigh on the stock. Investors might also pause over Gannett's disclosure on Dec. 30 that it had speeded the vesting of 3.9 million employee stock options, which benefits top execs disproportionately. Neither the company nor the chairman of the board's compensation panel, former Fannie Mae CEO James Johnson, would explain why the move was needed.

These worries make Gannett my least favorite of the three. Just the same, look for each to report surprisingly better news to shareholders. You read it here first.

By Robert Barker

The Good Business Issue
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