Highlights include Washington Post Company (WPO), The New York Times Co. (NYT), The McClatchy Company (MNI), Gannett Co, Inc. (GCI) and The E.W. Scripps Company (SSP).

WPO: Margins Contract in Mainstay Education Business

Washington Post Company (WPO) posted 1Q09 results that proves even the higher education business isn’t impervious to a recession.

The publisher of its namesake newspaper and Newsweek magazine reported that 1Q09 EPS from continuing operations excluding one-time charges plunged to $0.41, grossly missing our estimate of $3.37 and the consensus of $3.48. EPS in 1Q08 was $5.68. Including the myriad charges, the company lost $2.04 in 1Q09, after earning $4.08 for 1Q08.

As expected, strong cable TV earnings partially offset accelerating declines in the company’s newspaper, magazine and television broadcasting businesses — which together generate nearly one-third of the company’s revenue. Unexpected, however, was the margin contraction in the Education division.

While better known for its Pulitzer Prize-winning newspaper, Washington Post Company derives more than half its revenue from its Kaplan education business, which has been growing strongly and, together with its cable operations, has been offsetting some of the company’s publishing losses. But in 1Q09, Kaplan’s Higher Education division — an international network of fixed-facility and online colleges, which generate 35% of WPO’s revenues — used a big hike in ad spending to fuel a 26% rise in revenues, squashing margins to 10.7% in 1Q09 from 14.8% in the year-ago quarter.

Kaplan’s other two Education businesses fared worse. The Professional division — 10% of WPO’s revenues — also sagged under the weight of a sinking economy, spawning operating losses as revenue fell 13%. Improvement hinges on an overall economic recovery. Kaplan’s third and most well-known business, Test Prep, generated just 12% of WPO’s revenue but 40% of its losses in 1Q09, as it took charges to close its money-losing Score centers.

In line with the industry, WPO’s Newspaper division leaked more red ink, as cost-cutting failed to keep up with falling revenue. The division generated an operating loss of $40.4 million, ex $13.4 million in one-time charges, as revenue fell 22%. Ad revenue at The Post plunged 33% in 1Q09, a similar rate suffered by The New York Times Co. (NYT) and The McClatchy Company (MNI)  and that we expect to see at Gannett Co, Inc. (GCI) and The E.W. Scripps Company (SSP). Online revenue — which had been the newspaper’s only growth engine until 4Q08 — slid 8% in 1Q09.

Also suffering from the carnage in the advertising market is WPO’s Broadcast Television division (10% of WPO’s revenues). TV operating income tumbled 21% in 1Q09 and we expect the decline to accelerate as earnings lap increasing amounts of election-related political advertising in 2008.

The sole engine of WPO’s earnings growth was the Cable division – 17% of total revenue. Cable operating earnings soared 23% on a 5% rise in revenue, as WPO leveraged costs.

Longer-term, we think the company will continue to grapple with the secular decline in its newspaper and broadcasting operations — high fixed cost businesses which account for nearly one-third of the company’s revenues  As readers migrate to the Internet and TV viewers seek other forms of entertainment (e.g. cable, DVDs, video games and Internet), ad dollars for WPO shrink. Online operations could take years and a change in business model to compensate for falling print revenue.

The battered economy and consequent weak ad spending are exacerbating the deterioration with no visibility to improvement. WPO’s education and cable divisions (52% and 17% of revenue, respectively) are two long-term bright spots, although we lack confidence in Kaplan’s ability to reinvigorate near-term earnings growth by cutting advertising in a recession.

While the stock is trading at 10x our estimate of depressed 2010 EPS, higher than our 8% estimate of the company’s 5-year growth rate, it pays a relatively low dividend (2.1%) at a time of high uncertainty. We are maintaining our Hold rating.

Read the full analyst report on “WPO”
Read the full analyst report on “MNI”
Read the full analyst report on “SSP”
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