Prudential Equity Group.docx
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Prudential Equity Group.docx
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PrudentialEquityGroup
PrudentialEquityGroup,LLC
Research
PrudentialEquityGroup,LLC
Research
Barlow'sBuy-Lines
January4,2005IndustryCommentary
Consumer
Discretionary
Publishing
IndustryRating:
Publishing:
Neutral
Advertising:
Favorable
Allimportantdisclosurescanbe
foundbeginningonpage38.
StevenN.Barlow
(212)778-4424
steven_barlow@
PhilipJ.Mulé
(212)778-4805
philip_mule@
C.ScottRattee,CFA
(212)778-4790
scott_rattee@
2005PublishingAndAdvertisingForecasts
..Thismonthweareprovidingour2005industryforecastsforboththe
publishingandadvertisingsectors.Inthepublishingsector,whatweseeas
probableoperatingheadwindsinpartoftheadvertisingmarketshouldmake
meaningfulupsidefromourcurrentestimatesunlikely.Combinedwith
valuationlevels—whichonaveragearehoveringatneitherparticularly
expensivenorenticinglycheaplevels—publishingstocksonthewholeshould
notoutperformthebroadermarketthisyear.Intheadvertisingindustry,we
maintainourFavorableindustryoutlookdespitethelackof“Quadrennial
Factors,”andexpecttheadvertisingstockstooutpacetheperformanceof
theoverallmarket.
..TheexpensingofstockoptionsisscheduledtotakeeffectonJuly1,2005.
Onpage14,weprovideatabledetailingtheimpactexpensingstockoptions
couldhaveoneachcompany’searningsfor2004comparedto2003.
..TheS&P500gainedalmost9.0%in2004,butourgroupperformedpoorly
comparatively,upjust1.3%.However,threecompanieswithimproving
freecashflow.McGrawHill,WashingtonPostandValassis
Communications.beattheS&Pin2004.
..InNovember,newspaperadvertisingrevenuegrew2.7%yearoveryear,the
lowestmonthlygrowthin2004thusfar.Retailwasuponlyslightly,witha
2.0%gain.Nationalgrew8.3%andClassifiedwasup3.7%.Within
Classified,HelpWantedledallcategories,up12.0%acrossallcompaniesin
ourcoverageuniverse.RealEstateclassifiedadvertisingcontinuedtogrow
steadily,up9.5%inthemonth.AutomotiveClassifiedremainedweak,
down5.0%.Gannett,oneofthetopperformersintermsofoverall
advertisinggrowthin2004,sawgrowthmoderateforthesecond
consecutivemonth,up5.6%,althoughsomeofthedecelerationwas
attributabletotougherfourthquartercomparisons.Notably,KnightRidder
postedanimpressivegainof6.6%,helpedbydouble-digitgainsinNational
andHelpWantedadvertising.
..InNovember,televisionrevenuegrowthfelltomoresustainable,non-political
levels.Onaverage,thebroadcastersinourcoverageuniversereported
5.0%growthintelevisionadvertisingrevenueinNovember,downfroma
29.4%averagegaininOctober,whenrecordlevelsofpoliticaladvertising
boostednumbersforalmostallcompanies(Tribunereceivedalmostno
politicaladvertising).ThetwodaysofpoliticaladvertisinginNovemberwere
afactorinhelpingNovemberrevenue.
PrudentialEquityGroup,LLC.
OneNewYorkPlaza..15thFloor..NewYork,NY10292
EquityResearchBarlowBarlow
Barlow’sBuy-Lines
TableOfContents
Publishing:
CompaniesWithStrongNicheProductsAndLocal
AdvertisingShouldLeadTheIndustryIn2005................................5
Advertising:
TheAdvertisingRecoveryThatTookShapeIn2004
ShouldContinueThrough2005WithA5.0%IncreaseInGlobal
AdvertisingRevenue....................................................................8
ThePublishingIndustry:
ValuationAndPerformance.....................11
ExpensingOfStockOptionsAndImpactOnEarnings....................14
DecemberCompanyNews(PrudentialEquityGroupComments
InItalics)..................................................................................15
NewspaperIndustryAnalysis......................................................16
EconomicAndIndustryTrends....................................................19
NewsprintAnalysis....................................................................22
TelevisionIndustryAnalysis........................................................23
2
PrudentialEquityGroup,LLC.
OneNewYorkPlaza..15thFloor..NewYork,NY10292
EquityResearchBarlowBarlow
Barlow’sBuy-Lines
TableOfFigures
Figure1StockPerformanceVersusTheS&P500:
December2004AndYearToDate................................................12
Figure2MonthlyIndustryReview..............................................................13
Figure3ImpactOfExpensingOfStockOptionsOnEarningsPerShare..........14
Figure4ChangeInLinage-November2004VersusNovember2003............16
Figure5NewspaperAdvertisingRevenue–November2004Versus
November2003..........................................................................17
Figure6NewspaperAdvertisingRevenueGrowthRates,
April-November2004...................................................................17
Figure7UpcomingComparisons:
DecemberComparableRevenueGrowth......18
Figure8ConsumerConfidenceIndex,December1992-December2004.........19
Figure9InitialClaimsForUnemploymentInsurance,Long-And
Short-TermComparisons..............................................................20
Figure10NationalHelpWantedIndex..........................................................21
Figure11NewsprintPricePerTonne,1994-2005E........................................22
Figure12PotentialEffectOnEarningsOfA$50ChangeInNewsprintPrice.....22
Figure13PoliticalTelevisionAdvertisingRevenue,
January2004-November2004,SelectCompanies..........................23
Figure14CashFlowGrowthForecastsByBusinessLine,2004E.....................23
Figure15ThePrudentialEquityGroup,LLCPublishingAndAdvertising
Universe.....................................................................................24
Figure16StockPerformanceSinceDecember2002......................................25
Figure17AdjustedEnterpriseValuetoEBITDA.............................................26
Figure18Price-To-EarningsValuation...........................................................27
Figure19Price-To-After-TaxCashFlow........................................................28
Figure20BeloCorp–MonthlyPublishingRevenueComparisons,
January2003-November2004......................................................29
Figure21DowJones–MonthlyAdvertisingLinageComparisons,
January2003-November2004......................................................29
Figure22GannettCo.–MonthlyPublishingAdvertisingRevenue
Comparisons,January2003-November2004..................................30
Figure23JournalRegister–MonthlyPublishingAdvertisingRevenue
Comparisons,January2003-November2004..................................30
Figure24KnightRidder–MonthlyPublishingAdvertisingRevenue
Comparisons,January2003-November2004..................................31
Figure25LeeEnterprises–MonthlyPublishingAdvertisingRevenue
Comparisons,May2003-November2004.......................................31
Figure26TheMcClatchyCo.–MonthlyPublishingAdvertisingRevenue
Comparisons,January2003-November2004..................................32
3
PrudentialEquityGroup,LLC.
OneNewYorkPlaza..15thFloor..NewYork,NY10292
EquityResearchBarlowBarlow
Barlow’sBuy-Lines
Figure27MediaGeneral–MonthlyPublishingAdvertisingRevenue
Comparisons,January2003-November2004..................................32
Figure28TheNewYorkTimesCo.–MonthlyPublishingAdvertising
RevenueComparisons,January2003-November2004.....................33
Figure29PulitzerInc.–MonthlyPublishingAdvertisingRevenue
Comparisons,January2003-November2004..................................33
Figure30Scripps(E.W.)–MonthlyPublishingAdvertisingRevenue
Comparisons,January2003-November2004..................................34
Figure31TribuneCo.–MonthlyPublishingAdvertisingRevenue
Comparisons,January2003-November2004..................................34
4
PrudentialEquityGroup,LLC.
OneNewYorkPlaza..15thFloor..NewYork,NY10292
EquityResearchBarlowBarlow
Barlow’sBuy-Lines
Publishing:
CompaniesWithStrongNicheProductsAndLocal
AdvertisingShouldLeadTheIndustryIn2005
Whatweseeasprobableoperatingheadwindsinpartofthepublishingadvertisingmarket
shouldmakemeaningfulupsidefromourcurrentestimatesunlikelyin2005.Combinedwith
valuationlevels—whichonaveragearehoveringatneitherparticularlyexpensivenorenticingly
cheaplevels—publishingstocksonthewholeshouldnotoutperformthebroadermarketthis
year.Therefore,wemaintainaNeutralindustryrating,butbelievethatmoneycanbemadein
selectnames,suchasDowJones(DJ—$42.96;ratedOverweight)andKnightRidder(KRI—
$66.99;ratedOverweight).
Weexpectonlyselectpublishingstockstooutperformin2005
becauseofseveralindustry-widetop-linegrowthchallenges.Weforecast
4.7%consolidatednewspaperadvertisingrevenuegrowthfortheindustryin2005after4.2%
expectedgrowthin2004.While2005isexpectedtobeabetteryearthan2004,ourgrowth
estimateisstilllessthan5.0%,whichwascommonduringthe1990s.Our2005estimateis
drivenbygrowthof4.0%forretailadvertising,3.5%fornational,and6.3%forclassified.
Webelievethathigheradvertisinggrowthlevelsareunlikelyforthree
reasons.First,aswedetailbelow,theadvertisingmarketisnotexpectedtofireonall
cylindersthisyear,aswepredictcategoricalpocketsofstrengt
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