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By Scott Kessler Are newspapers going the way of the dinosaurs? Advertising growth has been anemic (we at Standard & Poor's expect it to lag real gross domestic product in 2005). Subscriptions have been declining. Competition from other media, particularly the Internet, is substantial and growing. Input costs for paper and ink are quite high -- and rising. Employee-related expenses are also climbing.
In fact, over just the past week or so, Standard & Poor's Equity Research cut earnings estimates for three of the country's largest newspaper companies: Gannett (GCI
; S&P investment rank 4 STARS, buy; recent price, $74), Knight-Ridder (KRI
; 3 STARS, hold; $63), and New York Times Co. (NYT
; 3 STARS; $32).
In contrast, online advertising revenues rose 26% in the first quarter, according to the Interactive Advertising Bureau and PricewaterhouseCoopers. Segment bellwethers Google (GOOG
; 3 STARS; $289) and Yahoo! (YHOO
; 4 STARS; $37) each outpaced this strong growth. Moreover, Web businesses are largely unaffected by commodity prices and don't have legacy pension obligations.
THE YEAR IN PRINT. On June 21, we raised our projections for ValueClick's (VCLK
; 3 STARS; $11) 2005 revenues and EPS, reflecting the company's more optimistic second-half outlook for its online marketing services businesses. ValueClick provides a variety of Internet advertising and marketing services.
Thus, it isn't surprising to us that most of the major newspaper companies have taken notable steps this year, primarily related to acquisitions, to bolster their Internet offerings. Here's a recap, by month:
Dow Jones (DJ
; 2 STARS, sell; $35) bought MarketWatch in January, 2005, in a transaction valued at some $538 million. MarketWatch is a leading online provider of business news and financial information.
Washington Post Co. (WPO
; 2 STARS; $854) acquired Slate, an online magazine founded by Microsoft (MSFT
) in 1996. The price hasn't been disclosed, but unconfirmed estimates have been as high as $10 million.
Gannett, Knight-Ridder, and Tribune (TRB
; 3 STARS; $37) jointly acquired 75% of Topix.net, a leading news content-aggregation service, valuing the company at roughly $64 million.
New York Times purchased About.com, a provider of consumer information on a variety of topics, for $410 million.
; not ranked; $12), publisher of the Financial Times, announced an alliance with Audible (ADBL
; 5 STARS, strong buy; $18) to deliver innovative learning products to the higher education market. Audible is a leading provider of digitally delivered spoken-word audio content via the Internet (see BW Online, 6/21/05, "The Sweet Sounds from Audible").
EW Scripps (SSP
; 3 STARS; $50) announced the proposed acquisition of Shopzilla (formerly BizRate.com), a leading Internet comparison-shopping service, for $525 million. We expect this transaction to be consummated this summer, pending necessary approvals.
Gannett acquired PointRoll, a rich-media marketing company. Unconfirmed reports indicate the deal valued PointRoll at some $100 million.
STRENGTHENING POSITIONS. After reviewing the deals listed above, I found it notable that all of them were for cash, not stock. This indicates to me that the acquirees were more comfortable accepting hard currency, rather than shares of companies in the troubled newspaper business.
S&P believes considerable concerns hang over the newspaper business, and its companies are spending a lot of money on acquisitions as a result. But, in our view, there are many ways these outfits could enhance their competitive position and growth prospects in the online world, without necessarily making big purchases of third parties. Here's how:
Embolden the brand. Newspapers have recognized and trusted brands. Their household names should be used to drive readers online. We think traditional media promotions for online offerings are being underutilized. Internet properties could also stimulate interest in the newspapers themselves. Partnerships (around content, distribution, or marketing, for example) are also a cost-effective way to promote Internet brands. Content alliances could enable newspaper Web sites to become more like portals, fulfilling a variety of user interests and garnering greater related usage.
Leverage existing relationships. Newspapers have direct relationships with millions of consumers. In many cases, they have specific, and thus useful customer information that could be employed for successful Net efforts. Newspaper companies could also invest more in developing and empowering online communities that could be the basis of differentiated content and engender greater loyalty.
Enhance customer focus. The Web is an excellent platform for interacting with customers. Customer self-service is a significant opportunity, in our view. Users would have easy and convenient access to service options at a significantly lower cost to the newspaper concerns. Moreover, newspapers could use the Internet to solicit feedback on current offerings and suggestions for new enhancements or services.
Unlock content value. People want information, and newspapers have been successfully fulfilling this demand for more than a century. They provide compelling content, but we think it isn't being leveraged to its full extent. Many newspapers are giving away all of their online content for free, and we think greater associated discipline is probably appropriate. Charging for access to premium content and archives of stories, photos, and even front pages is a possibility.
We think new distribution formats, such as spoken-word audio, have potential. In addition, new types of content are being created in the Web world. Blogs and podcasts are a good way to reach a younger audience and can generate advertising revenues, in our view. Real-time chats with writers and other special events could be made exclusively available online.
I'm not an expert on the newspaper business, but I think its companies have more assets and opportunities than people realize. S&P expects newspaper concerns to continue acquiring Net companies, and many are taking steps like those listed above. However, we also believe newspapers have brands, customers, and content that could be used more effectively to drive more online traffic and revenues. Additionally, in our view, new types of content, services, and distribution, specific to the Internet, constitute a notable opportunity.
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S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:
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Standard & Poor's Equity Research Services: Standard & Poor's Equity Research Services U.S. includes Standard & Poor's Investment Advisory Services LLC; Standard & Poor's Equity Research Services Europe includes Standard & Poor's LLC- London and Standard & Poor's AB (Sweden); Standard & Poor's Equity Research Services Asia includes Standard & Poor's LLC's offices in Hong Kong, Singapore and Tokyo.
In the U.S.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.8% of issuers with buy recommendations, 56.7% with hold recommendations and 12.5% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 29.2% of issuers with buy recommendations, 50.5% with hold recommendations and 20.3% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 34.3% of issuers with buy recommendations, 48.0% with hold recommendations and 17.7% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.2% with hold recommendations and 13.8% with sell recommendations.
5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.
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Readers should note that opinions derived from technical analysis might differ from those of Standard & Poor's fundamental recommendations. Kessler is director of information-technology equity research at Standard & Poor's