News Not Good for Wash Post

More than one-third of The Washington Post’s (WPO - Analyst Report) revenue comes from newspapers and broadcasting businesses that are in secular decline. As readers migrate to the Internet and TV viewers seek other forms of entertainment, ad dollars shrink. The poor economy and consequent weak ad spending are exacerbating the deterioration, with no visibility to improvement.

WPO’s education and cable divisions are two bright spots, well-positioned to continue generating double-digit operating income. Nevertheless, the stock is trading at 17x 2009E EPS, a substantial premium to our estimate of its 5-year growth rate, at a time of high uncertainty.

We think WPO will continue to make small acquisitions while focusing on improving its profitability. The cable division is performing well, in line with the industry, and we expect high single-digit revenue growth and low single-digit operating income growth in 2008.

The management expects to revive results by expanding the audience online, albeit on a small base, and cut operating expenses with a voluntary retirement program, which will be completed in 2Q08.

WPO’s Magazine publishing division is suffering greater than the overall industry, whose circulation has not fallen as sharply as the newspaper industry. The company is attempting to pare its cost structure in line with the shrunken revenue stream, announcing a Voluntary Retirement Incentive Program to some Newsweek employees. In February 2008, 115 employees accepted the offer.

Read the full analyst report on WPO