QUARTERLY EARNINGS REPORTS AGAIN DEFY WALL STREET

Last recession's lessons are still playing out, to the joy of publishers

A Reuters story crossed my virtual desk last week, carrying the headline, "Stop the presses: U.S. newspaper profits stun Wall St." Stun is probably a strong word, but it is clear that The Street continues to underestimate the power of the local daily newspaper.

From reports gathered so far, it seems unanimous: The publicly traded newspaper companies have made gains year-over-year as well as gains from quarter-to-quarter. Knight Ridder of San Jose, for example, beat analysts' estimates by seven cents a share (when you subtract special one-time expenses). The analysts – represented in a poll done by First Call/Thomson Financial – had envisioned KR earnings in the second quarter of 95 cents; it was $1.02 (and that's up from 83 cents last year).

This is despite predictions – Wall Street predictions – that the Internet would sap the power of the daily paper to generate profits.

Advertising is up, and that can cover a multitude of sins. Yes, newsprint prices are going up. Yes, circulation is declining. But these are offset by ad growth. And the ad growth goes directly to the bottom line.

The lessons learned from the recession of the early ’90s – you remember, the one President George Bush declined to admit existed – are reaping the print profits of today. I've often quoted the old line, "You can't cut your way to profits," but it is certainly interesting that the efficiencies developed during those hard times are bearing fruit almost a decade later.

That recession was a wake-up call – newspapers could no longer be run as mom-and-pop operations (no offense to anyone's mom or pop intended). There had to be real planning, real goals, real efficiencies to match the reality of publishing a daily paper in the ’90s.

What's on the horizon? We have a pretty hefty newsprint price increase coming at the beginning of the fourth quarter and though analysts are skeptical that it will stick, it's just a matter of time before a big paper price increase does come. In fact, Montreal-based Abitibi-Consolidated, the leading newsprint manufacturer, announced last week that it was shutting down one newsprint plant and selling another to a consortium that plans to convert it to magazine-grade stock. Fewer plants mean less product, which means a higher price.

Additionally, there is a pretty heavy-duty expectation among newspaper advertising executives and analysts that the windfall of dot-com advertising that publishers saw last year in the fourth quarter will continue unabated again this year.

But then, those are the predictions of analysts – and since they've been so wrong about our industry, why should we believe them when it comes to newsprint or dot-coms?

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Housekeeping notes: