It's no secret that the newspaper industry has faced major challenges to growth, with a huge part of the issue being the Internet. However, one lesser-known newspaper publisher, Lee Enterprises (NYSE:LEE) (nope, it's got nothing to do with dungarees), has reported solid first-quarter earnings, with online revenues helping it along.

When considering the newspaper industry, many of us immediately think of big names like Dow Jones (NYSE:DJ) (which publishes The Wall Street Journal), New York Times (NYSE:NYT), Tribune (NYSE:TRB), Gannett (NYSE:GCI), and Washington Post (NYSE:WPO). While these companies have national renown, Lee focuses on small- to mid-sized markets, with ownership or interest in 51 dailies, more than 300 weeklies, and some specialty publications.

Although Lee's first-quarter revenues only rose 2.8% to $300.5 million, net income increased 17% to $26.7 million, or $0.58 per share, including discontinued operations. Operating income increased 13.5% to $64 million, and operating cash flow increased 12.5% to $80.9 million.

Lee's advertising revenue may have increased a mere 2.3%, but online advertising revenue growth surged by 53%. The company said its success in online sales helped the quarter, and it has some additional plans in that respect, such as a co-branded endeavor with Yahoo!'s (NASDAQ:YHOO) HotJobs for local employment listings as well as something it calls Lee Online University, an internal initiative through which it will "speed more interactive innovation in news and sales."

There are plenty of reasons to feel bearish about the growth outlook for the newspaper industries, but when Lee was recommended for Motley Fool Income Investor last August, some competitive advantages were revealed, such as its strong hold on small markets (many of which can sustain only one paper) as well as a growing Internet presence connected to many of its publications. And of course, there was that dividend yield of 2.7%. (For the full investment thesis, take a free trial to Income Investor.)

Personally, I'm pretty bearish about the newspaper industry, although I do agree it's ripe for innovation. Lee does seem like an interesting stock to keep an eye on, given its local focus and growing Internet presence, but I'm not convinced it's an underfollowed, undervalued stock right now. Its P/E of 21 -- and forward P/E of 16 -- sounds steep, although on par with some of its rivals. Then, consider Lee's per-share earnings are only expected to grow 4% and 4.5% this year and next (its PEG ratio is a whopping 3.28, higher than many of its peers). Although cash flow generation and dividend yield are part of the equation, too, it seems to me that, given the industry's challenges, investors might wait for a better opportunity.

Read all about some related Foolishness:

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Yahoo! is a Motley Fool Stock Advisor recommendation.

Alyce Lomax does not own shares of any of the companies mentioned.