NEWSPAPER STOCKS CONTINUE TO PUZZLE WALL STREET

One analyst sees an upswing, thanks to returns on core abilities

Periodically the phone rings here and someone wants to know about the newspaper segment of the stock market. What's happening, they want to know.

Usually, I have to profess bafflement, as I have no answers to their questions. Take, for example, the month of November: prices in our NewsInc. Stock Index (17 publicly traded companies in which newspapers play a predominant earnings role) dropped an average of 1.33 percent each week.

This was after four newspaper companies were selected for the Inter@ctive Week Internet 500.

This was after earnings announcements in October that kept using the word "record" over and over again.

This was after September's Media Metrix ratings of the top 500 most-visited sites on the Internet, in which newspaper sites garnered a dozen spots (networks – like Knight Ridder's Real Cities – weren't counted; if they had been, there would have been about a dozen more).

In November, the newspaper business' stocks held the lowest price-earnings ratio in the last 20 to 25 years, in comparison to the Standard & Poor's 500.

All of this prompted Morgan Stanley Dean Witter Analyst Doug Arthur to release a research note at the end of the month predicting a newspaper price advance. Arthur said that "strong revenue, excellent near-term earnings prospects and very inexpensive stock prices should create a rally" in the sector.

Arthur's favorite newspaper companies included Times Mirror Co., Dow Jones & Co., Knight Ridder, Gannett Co. Inc., New York Times Co., Central Newspapers Inc. and Journal Register Co.

Arthur said strong national advertising sales will help the overall financial picture of newspapers. Dot-com advertising – that of the new Internet-based companies – would be a driving force, Arthur said. Saying that "most newspapers still reach a larger daily audience – in their respective markets – than any other media," the analyst asked where a dot-com could turn.

"If you are a fledgling Internet start-up with lots of excitement, a recent IPO, and very little (if any) internal cash flow, you must build audiences very quickly," Arthur said. "The result is a major move to newspapers."

The day after Arthur's research note, PaineWebber Inc. announced that it was initiating coverage of seven newspaper-oriented companies. Of the seven, four (Knight Ridder, New York Times, Times Mirror, Tribune Co.) were given "buy" ratings, while two were rated as "attractive" (Dow Jones and Gannett).

And the day after that, the market reacted by bringing up the NewsInc. Index by ... seven-tenths of a percent (admittedly, this was on a day that the market in general only went up about the same). The general Wall Street rap is that newspapers' value is locked up in the traditional, capital-intensive part of the business – the ink-on-paper stuff that we keep making money with.

Newspaper companies with significant on-line business keep looking like they will spin off their on-line stuff – or at least build tracking stocks from them. With Wall Street continuing to punish publishers for their reliance on the portion of the business that actually turns a profit, spin-offs or tracking stocks look more and more attractive.

But a spin-off then puts the expertise of the new media executives outside the control of publishers, which defeats the entire purpose of the new media exercise. There really are synergies between on-line and print, and companies that have to separate in an attempt to extract more stockholder value will be cutting off their noses to spite their faces.

Which would be even more baffling than Wall Street.

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Holiday cheer desk: At this time of year, we have two messages: