ANALYSIS-Cheap US newspaper stocks may reward the patient
NEW YORK Jan 11 (Reuters) - U.S. newspapers promise misery for investors this year as advertising sales erode and a possible recession looms, but steady cashflow and cheap shares may reward shareholders who grit their teeth and ride it out.
The perception on and off Wall Street is that the newspaper business is in big trouble as readers flee to the Internet, and things will only get worse this year as the real estate and financial industries slash spending on ads.
While these trends are real, some investors are holding -- and even increasing -- their stakes in newspaper publishers, attracted by low valuations after stock prices have fallen by as much as 70 percent over the past 12 months.
Thomas Russo, partner at Gardner, Russo & Gardner, keeps a small position in McClatchy Co (MNI.N), The Washington Post (WPO.N) and EW Scripps Co (SSP.N), saying shares are reasonably priced and opportunities abound for newspapers to cut costs.
McClatchy has "substantial flexibility left to reduce operating spending," Russo said, pointing to shaving the width off newspapers, cutting staff from the 2006 purchase of Knight Ridder Inc, and relying on more user-generated content -- writing, audio and video that they do not have to pay for.
Another investor, Private Management Group, raised its stake in Journal Register Co JRC.N to more than 9 percent from 6 percent, according to a filing with U.S. securities regulators this week.
"We look at these stocks and say, if we didn't own them, we would buy them here, and that is because we think they are just ridiculously cheap," said another investor, who declined to be identified. "If you have something that's trading at six times its cashflow, you can get your money back real fast."
Lower interest rates make some newspaper stock yields look more attractive to value investors, said Benchmark Co analyst Ed Atorino. He pointed to USA Today publisher Gannett Co Inc (GCI.N), which he said has a 4.85 percent yield with good prospects for a higher dividend.
"With the stock trading at a 15- or 20-year low, you could get some short covering or people thinking, 'You know, at $30 at a 5 percent yield, how much could I lose?'" Atorino said. "Famous last words, but some people might think that."
DEEP FREEZE
Despite the attractive valuations, most of Wall Street has put newspaper stocks in a deep freeze. The reasons have been clear for the past three years: Classified and display advertising has been drying up in newspapers' print editions, which account for most publishers' revenues.
Some of this has happened because of wider economic troubles in the housing market as well as the ongoing credit crunch hurting markets worldwide, but newspapers also are losing subscribers and advertisers to the Internet, where they can place ads at cheaper prices and read the news for free.
The only investors to make serious money from newspapers last year were shareholders of Dow Jones & Co Inc and Tribune Co, which were both taken private in surprise deals. Investors should not bet on white knights for other newspapers this year, analysts said .
Goldman Sachs this week cut earnings targets for the newspaper publishers it follows, pushing almost every newspaper stock to 52-week lows. Analyst Peter Appert said the business may turn in its weakest revenue performance since 2001.
"It's business as usual, which is to say, bad," Appert said. "There is a buyer's strike for the newspaper stocks. Investor interest is at an all-time low."
Even after steep share price declines, Bank of America analyst Joe Arns considers newspaper shares to be still somewhat expensive at about eight times estimated free cashflow because the business is growing less lucrative.
That amounts to a paucity of buyers. "The only investors now are the deep value guys, definitely not the fast money guys," Arns said.
The problem for investors looking for a rebound is that 2008 may not be the year. According to McClatchy Chief Executive Gary Pruitt, he does not want short-term buyers to buy the stock. "It's not a stock to flip," he said at an industry conference in March.
No one, including the publishers themselves, can predict with any certainty when the business might improve and share prices hit bottom. Most experts say it will take a turnaround in the economy, as well as a substantial rise in Internet revenue -- something that is several years away at least.
(Editing by Dave Zimmerman)
((robert.macmillan@reuters.com; +1 646 223 6012; Reuters Messaging: robert.macmillan.reuters.com@reuters.net)) Click here to see Reuters MediaFile blog Keywords: NEWSPAPERS/
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