Dear Mr. Berko:

You should know your newspapers. So please give me your opinion of the newspaper industry and of The New York Times, the Tribune Co. and Knight-Ridder. Also, there’s a small newspaper called the Journal Register. Please tell me about this company, too, and let me know if you favor a purchase.

W.H., Charlotte, N.C.

Dear W.H.:

The suits on the Street have a modest forecast for the newspaper business even though this group has lagged the general performance of the market in the past few months. They reckon that advertising revenues will rise about 5 percent in 2005, compared with a 4 percent increase last year.

However, the folks I know in this business tell me that higher advertising rates will be responsible for higher revenues rather than increased sales of advertising space or more advertisers. They tell me that circulation in 2004 was down 2 percent from 2003 and that circulation for 2005 may be down 1 percent from 2004.

The decline in circulation appears to be an ongoing phenomenon, which is a result of several factors:

1. Readership has dropped significantly among the 20- to 45-year-olds who don’t give a fig about what’s happening in their community or the world.

2. There’s been a notable decline in the literacy rate among many Americans, and it’s quite likely to slip even more.

3. An increasing number of Americans do not speak English, and there has not been a proportionate increase in foreign-language (primarily Spanish) publications. According to my media sources, these folks prefer to watch TV for their news rather than peruse a newspaper.

4. The Internet has become an information source of preference among a growing segment of the population that doesn’t trust the media and believes they’re biased.

Recognizing these trends, many newspapers have cut staff and insist that the remaining employees be more productive. They have reduced corporate contributions to employees’ 401(k) plans and require that employees pay an increasingly larger percentage of their health-care insurance premiums. They have reduced sales commissions and incentive bonuses and on some products have eliminated commissions completely.

The savings plus cost reductions should enable many papers to bring home higher earnings in 2005. However, the newspaper industry might have a difficult year in 2006.

Certainly the Tribune Co. (TRB-$39.34), which owns the Chicago Cubs, Newsday, the Los Angeles Times, the Orlando Sentinel, the Chicago Tribune, The Baltimore Sun and nine other dailies — plus 26 television stations and other entertainment properties — should do well. The stock is down from its 12-month high of $53 and trades near a two-year low and at 16.7 times 2005 expected earnings of $2.35.

Knight-Ridder Inc. (KRI-$67.20) owns 31 daily papers, including the Miami Herald, the Detroit Free Press and the Philadelphia Inquirer. Last year, KRI had $3 billion in revenues, earning $4.05 per share. This year, those revenues are expected to rise 10 percent to $3.3 billion, and management expects earnings of $4.40 with record net profit margins. KRI has the best dividend growth record in the industry, and the stock, which had traded as high as $80, now yields a good 2.1 percent.

But I wouldn’t own the New York Times Co. (NYT-$35.77), which also owns the Boston Globe, 14 small daily papers in the South and in California as well as eight TV properties and a couple of radio stations. NYT’s basic problems are a weak advertising sales force and family management. The shares, which were $50 not long ago, may fall even further. The dividend growth is expected to be weak, and there may be some quiet dissent among members of the Ochs family members.

Quick as a bunny, I’d be a buyer of the Journal Register Co. (JRC-$16.60. This is an interesting publisher that owns 27 small dailies in towns such as Willoughby, Ohio, North Attleborough, Mass., New Haven, Conn., and Oneida, N.Y., to name just a few. The total circulation of its dailies is just under 700,000. But JRS also owns 327 non-daily publications with a distribution of 5.2 million.

JRC went public in 1997 at $15 per share and has grown via acquisition, adding five papers in 2004. Management expects to continue its growth by purchasing new properties. JRC has pioneered the “clustering” business model, which has enabled the company to enjoy some of the best margins in the industry. And though JRC is much more leveraged than its competition, its operating income was an impressive 6.2 times its interest cost. Earnings are expected to increase to $1.40 per share in 2005 from $1.23 last year, so the shares trade at a low price/earnings ratio of 12. In the next 12 months, I think JRC could trade between $22 and $24 a share. This is an uncommonly nifty company with strong, aggressive management. Its price-to-cash-flow and price-to-sales ratios are well below those of its competitors while its profit margins and return on equity put the competition to shame. I think JRC could be a classy long-term investment.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.