The 3Q05 Wish List report will be delayed until tomorrow because of a few unreturned phone calls.  The unfinished business is our final investment opinion on two companies, which is difficult to procure without having some lingering questions first answered.  Answered or not, the Wish List will be released before tomorrows bell.

As with most Wish List reports Todd and I look at a lot companies but only cover a few.  Some companies we showed an interest in but did not make the cut for tomorrows Wish List include Transcend Services Inc. (TRCR), Allied Healthcare Products Inc. (AHPI), Cooper Tire & Rubber Co. (CTB), and Hooper Holmes Inc. (HH).

As well, we took a quick look at newspaper stocks, which historically have offered the investor predictable returns. With the US economy supposedly doing well you would think that newspaper companies are thriving.  They are not.

Want To Advertise?

McClatchy Company (MNI), which produces the Sac Bee, Star Tribune, and many others, reported that consolidated advertising revenues in August 2005 increased by 2.7%. However, advertising focused on autos were off by 11.4% in August, and national advertising revenues were down by 1.7%. What was one of the main drivers of the positive 2.7% year-over-year increase? You guessed it, Real Estate advertising – up a whopping 17.5%!.

A similar advertising trend is seen at the NY Times (real estate advertising is up 4.3% year to date while automotive advertising is down9.6% ), Gannett (RE up 2.7%, autos down 9.8% in Aug) and Knight Ridder (RE up 8.9%, autos down 9.6% in Aug).  What do these numbers mean? That the bubbling US housing/real estate market has, perhaps temporarily, been one of the main drivers behind advertising revenue increases at many major papers.

Keeping the above trend in mind, it is not a coincidence that the Washington Post Co., Gannett Co. Inc., McClatchy Co., Tribune Co., New York Times Co., and Knight-Ridder Inc. have each touched new 52-week lows in recent sessions. Rather, with the housing bubble showing signs of a top advertising dollars may soon be even harder to come by.  Moreover, with the conference board indicating last week that help wanted advertising reached a 2005 low in August, another driver of newspaper ad gains – employment – is also suggesting a slow down.

Unfortunately for newspaper managers trying to concoct plausible reasons for recent stock price carnage, the ominous advertising trends threatening to negatively impact newspaper related companies arrived before Katrina and Rita did.

What About Online Advertising?

Google, which trades at more than 3-times the size of the Washington Post., Gannett, and the New York Times combined, has not been negatively impacted by any advertising slow down. A legitimate question is nonetheless important given the company’s sky high stock price:

Have investors forgotten that despite offering a hot new service on a regular basis (along with some more stock), that Google still derives more than 98% of revenues from advertising?

Ahh yes, but Google is internet based – a place were, apparently, anything goes.

Forget that online advertising dollars can actually decline now and then (as they did in 2002), and remember that no one reads newspapers anymore!

Knock the old economy papers if you want, but advertising dollars are in search of eyeballs. A decline in the dollars being put into newspaper advertising could be a warning that Google’s days of seemingly uncontested growth are drawing near.

© 2005 Brady Willett
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