Magazine article Editor & Publisher

Morningstar: Battered Newspaper Shares Still the 'Market's Most Overvalued Stocks'

Magazine article Editor & Publisher

Morningstar: Battered Newspaper Shares Still the 'Market's Most Overvalued Stocks'

Article excerpt

Shares of nearly all publicly traded newspaper companies have lost upwards of 80% of their value in the last year -- but they haven't hit bottom yet, says a blistering report on the sector released Monday by Morningstar.

The Chicago-based independent research firm calls newspapers "the market's most overvalued stocks."

"Such sharp price declines (including a 52% drop for Gannett, an 82% dive for McClatchy, and a 94% loss for rural/suburban publisher GateHouse), coupled with what may be perceived as currently cheap valuation ratios, could be tempting to value-minded investors, but we say, 'Look out below!,'" says the report by Matthew Coffina, with contributions from analyst Tom Corbett.

"We think the stocks have further room to fall, as declining revenues and negative operating leverage combine to create a downward spiral for this moribund industry," Morningstar added.

Morningstar offers the usual reason for its pessimism about newspapers: high fixed costs with "steadily" shrinking revenues are squeezing profits as the Internet steals readership and ad share "at an accelerating pace."

"We don't anticipate these trends to reverse and consider the newspaper industry unattractive as a whole," the report concludes.

Morningstar singles out five newspaper stocks that it says are trading at "significant premiums" to its estimates of their fair value.

Morningstar assigned Gannett a fair value of $12.00 a share. Monday morning, Gannett (NYSE: GCI) was trading at $19.99, off 66 cents, or 3.2% from the opening. Morningstar said it expects the nation's largest newspaper company's revenues to fall at 5% annually over the next five years, with operating income declines averaging 14% annually. …

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