This month we are providing our 2005 industry forecasts for both the
publishing and advertising sectors. In the publishing sector, what we see as
probable operating headwinds in part of the advertising market should make
meaningful upside from our current estimates unlikely. Combined with
valuation levels—which on average are hovering at neither particularly
expensive nor enticingly cheap levels—publishing stocks on the whole should
not outperform the broader market this year. In the advertising industry, we
maintain our Favorable industry outlook despite the lack of “Quadrennial
Factors,” and expect the advertising stocks to outpace the performance of
the overall market.
􀁺 The expensing of stock options is scheduled to take effect on July 1, 2005.
On page 14, we provide a table detailing the impact expensing stock options
could have on each company’s earnings for 2004 compared to 2003.
􀁺 The S&P 500 gained almost 9.0% in 2004, but our group performed poorly
comparatively, up just 1.3%. However, three companies with improving
free cash flow⎯McGraw Hill, Washington Post and Valassis
Communications⎯beat the S&P in 2004.
In November, newspaper advertising revenue grew 2.7% year over year, the
lowest monthly growth in 2004 thus far. Retail was up only slightly, with a
2.0% gain. National grew 8.3% and Classified was up 3.7%. Within
Classified, Help Wanted led all categories, up 12.0% across all companies in
our coverage universe. Real Estate classified advertising continued to grow
steadily, up 9.5% in the month. Automotive Classified remained weak,
down 5.0%. Gannett, one of the top performers in terms of overall
advertising growth in 2004, saw growth moderate for the second
consecutive month, up 5.6%, although some of the deceleration was
attributable to tougher fourth quarter comparisons. Notably, Knight Ridder
posted an impressive gain of 6.6%, helped by double-digit gains in National
and Help Wanted advertising.