Washington Post Company (WPO)

More than one-third of The Washington Post's (NYSE: WPO - News) 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.

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.

In 2007, The Washington Post's cost per thousand (CPM) was $11.32, compared to an average of $6 for online advertising. In an economic downturn, companies may look to the cheaper internet advertising to reach audiences, which would bring down demand for WPO's inventory and lower CPM rates further.

Newsprint, WPO's second largest expense (next to labor) climbed to $700 per ton in November 2008, up more than 26% from a year earlier. Higher newsprint prices spell doom for WPO's already low operating margins in the newspaper and magazine businesses.