Lee Enterprises: Surprise News
An under-the-radar newspaper stock makes positive headlines.
 
Stop the presses! Someone says something nice about a newspaper stock. Yep. It's true. Deutsche Securities upgraded the shares of Lee Enterprises (symbol LEE) on January 17, and the stock responded with a 5.5% gain, to $31.90. That's a big splash for a group of stocks that seem to have been bleeding red since the millennium. Such storied news chains as Gannett, McClatchy and Tribune have either imploded or sagged so long that only a masochist or a rock-ribbed contrarian would invest in them now and expect much appreciation. Tribune's inability to find a buyer willing to pay much of a price summarizes big money's disdain for newspaper investments.
But smaller, under-the-radar companies may be better bets, particularly if they can demonstrate rising circulation in suburbs and faster-growing small cities. There's also the promise of online ad riches. Lee, which is based in Iowa and owns 58 dailies in 23 states and a slew of weeklies, recently reported that its online ad revenue is growing more than 50% annually, compared with an industry average of 25%. The Web brings Lee just 5.5% of its ad income now, but the trajectory is impressive. Continued growth of Internet ad sales would mitigate much of the decline in classified revenues.
Moreover, circulation is up at most of Lee's daily papers, including, improbably, its largest property, the St. Louis Post Dispatch. St. Louisans are avid newspaper readers and baseball fans. Advertising and newspaper sales bumped up last year as the Cardinals unexpectedly won the World Series.
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Getting back to the stock, Lee shares sell at about 20 times earnings, which is expensive for a company in a troubled sector. But Lee produces healthy free cash flow (earnings plus non-cash charges, minus the capital expenditures needed to maintain the business), pays a good dividend (the stock yields 2.5%), and is working down the long-term debt it assumed to buy the Post-Dispatch and the Arizona Daily Star in 2005.
Lee is still old media, but if you're game for an overlooked stock in a sector that's out of favor, it's a name worth considering.
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Kosnett is the editor of Kiplinger Investing for Income and writes the "Cash in Hand" column for Kiplinger Personal Finance. He is an income-investing expert who covers bonds, real estate investment trusts, oil and gas income deals, dividend stocks and anything else that pays interest and dividends. He joined Kiplinger in 1981 after six years in newspapers, including the Baltimore Sun. He is a 1976 journalism graduate from the Medill School at Northwestern University and completed an executive program at the Carnegie-Mellon University business school in 1978.
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