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Fool On The Hill

Tuesday, June 8, 1999

FOOL ON THE HILL
An Investment Opinion
by Warren Gump

Jonesing to Achieve Financial Success

Dow Jones & Co (NYSE: DJ) has been in my peripheral vision for well over a year now. I still haven't concluded whether the company is a good investment right now, but I think it's worth reviewing. The core asset of the company is The Wall Street Journal (WSJ), the nation's largest daily newspaper with an average circulation last year of 1.8 million copies. In addition to that operation, the company's print publications segment is involved in myriad other businesses, such as WSJ Europe and the Asian WSJ, Barron's weekly, SmartMoney magazine, and the National Business Employment Weekly. Overall, print operations accounted for 62% of Dow Jones' 1998 revenue.

Despite the fact that they're print publications, Dow Jones separates the operations of its Ottaway Newspapers unit that publishes 19 daily and 15 weekly newspapers throughout the country. This group, which has consolidated daily circulation of 568,000, accounted for 17% of 1998 revenue. Dow Jones' third business segment, the one that I believe provides the best opportunity for growth, is electronic publishing. This unit produces the Dow Jones Newswires, a key service to business professionals worldwide; Dow Jones Interactive, a news retrieval service; Dow Jones Indexes, which are licensed to creators of financial products; and WSJ Interactive, the largest paid subscription service on the Internet with over 283,000 subscribers. Electronic publishing accounted for 21% of 1998 revenues.

Dow Jones has also entered into a global alliance with NBC. As part of this deal, the company provides news information to CNBC under a multi-year license agreement. If you aren't a CNBC watcher, you will have missed seeing WSJ reporters discussing stories on the air, providing valuable exposure that reinforces the image of the WSJ being the premier source of business information. This alliance also included the combination of some CNBC and Dow Jones international operations, giving Dow Jones a 50% interest in the European and Asian portions of the cable network.

Going through just the major Dow Jones operations takes a lot of space, and I've still missed a number of its smaller ventures. Nonetheless, you get the idea. Dow Jones has its foot in the door of a lot of different opportunities, most of which focus on the business world. If you don't follow the company, you'll probably be shocked to learn that the its stock performance has been horrible over the past five years, even as the U.S. has enjoyed one of the greatest bull markets in history. This chart compares Dow Jones to the S&P 500 over the past five years. As of today, it shows Dow Jones with just over a 50% gain, compared to a nearly 200% increase for the S&P 500.

Quite a few problems have hindered the company, the most notable being Telerate, a supplier of real-time market information that was divested in 1998. This division posted restructuring charges and operating losses of over $1 billion in 1997 and 1998. With the problems at Telerate in the rear view mirror thanks to its sale, Dow Jones management has been able to focus on resurrecting its core operations.

Below are the company's "Focus Forward" objectives, as announced last September:

* Grow earnings per share (EPS) at a compound rate of at least 10% over the long-term

* Achieve a long-term corporate EBITDA (earnings before interest, taxes, depreciation, and amortization; a measure of cash flow) margin of 26%

* Attain a 50/50 profit mix between print publishing and the combined operations of the community newspaper and electronic publishing division

Achieving the first objective would be a joyous improvement in trends, considering that the company's ongoing EPS have not even grown 10% over the past four years. The key to this growth in the short-term will be improving profitability in the Community Newspapers divisions, which is benefiting from a restructuring program implemented last year. The print publication segment should benefit from an increasing portion of general advertising at the Wall Street Journal. Important categories that are boosting ad spending are technology and consulting companies, as well as retailers.

Profitability in the electronic publishing division will be hampered in the near-term as Dow Jones invests to build its sales and marketing function, but should be the driver of sustainable long-term growth. One of the company's key objectives is to expand worldwide penetration of its newswires. While opportunities for the WSJ Interactive edition and other new Internet ventures are substantial, enthusiasm for these endeavors in the next couple of years should be tempered by reality. These operations are only a nominal revenue producer, pulling in $5 million in Q1 sales, just over 1% of the company's total. Ten years down the road, however, that percentage should be substantially higher.

As a frugal person always looking for a bargain, I'm attracted to turnaround situations. I have certainly learned that companies in the midst of a revitalization do not always deliver on what they promise. Nonetheless, I like the fact that Dow Jones is embracing Internet technology as a primary vehicle for information transmission. While investments in technology could hold back reported financial performance, it shows a willingness to invest for the future. In addition to building on its strong domestic infrastructure, Dow Jones has committed itself to developing a strong, worldwide presence as evidenced by its CNBC venture, the international editions of the WSJ, and the global sales efforts for its newswires.

Dow Jones seems to have the financial resources to pull off a turnaround. Its print operations and community newspaper division should throw off operating cash flow of at least $375 million this year. Some of that money will be needed for capital expenditures and the company's dividend, but a substantial portion should remain for share repurchases. With the proceeds from last year's divestitures and operating cash flow, Dow Jones bought back over 6% of its outstanding shares during the past year. Long-term debt stands at a very manageable $150 million.

While the prospects of combining the Dow Jones and WSJ resources and brands with the Internet and global opportunities sparks my interest, management's ineptitude over the past few years is hard to forget. Will they be able to deliver on everything that has been promised? Will they figure out how to leverage their strong franchise to create revenue and earnings growth in the decades ahead? The possibility for tremendous success certainly exists, but the question of whether it will be realized still lingers.

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