Roy Den Hollander

1. Dow Jones & Company, Inc.
Security Analysis
Professor Landsman
Team Members:
David Berkowitz
Scott Davis
Roy Den Hollander
Dan Lysik
Tony Shober

2. Executive Summary
Recommendation: BUY. Based upon a three stage FCFE model, we assign Dow Jones an intrinsic value of
$44.82. Based on the current market price of $39.63, this provides a 13% margin of safety.
BUT … How does Dow Jones, the company that owns the Wall Street Journal and Barron’s under-perform the
DJIA since 1984 ?!
· Dow Jones & Company (DJ), owner of The Wall Street Journal, Barron’s, and Telerate and a NYSE listed
company, has traded between ___ and ___ during the last 52 weeks. DJ closed at 39 5/8 on 15. April, 1997,
and with ____ million shares outstanding has a market capitalization of $___. During the last month analysts
reduced earnings estimates for DJ from $2.00 to $1.20 - 1.40.
· Deterriorating conditions at Telerate have led management to announce a $650 million, four year
expenditure plan to revive and upgrade product offerings and ameliorate Telerate’s decline. In Q197
revenues for the Financial Information Services division at DJ, of which Telerate is about 90%, dropped
5.4% accompanied by an 84% drop in operating income.
· Controlling interests vocalize demands for improved shareholder returns coincident with Telerate’s
deteriorating performance. Shareholder activists including Michael Price, Jim Kramer, and Gotham Partners
have filed 13D paperwork in regards to DJ. Michael Price, in particular, has led successful proxy fights at
Chase Manhattan (pre-merger) and Sears in a similar push for better cash flows allocation and returns to
shareholders.
· Pressure on DJ’s previously insulated management will likely lead to cost restructuring. In the past,
the significant cash flows generated by DJ may not have earned DJ’s cost of capital, and led to deteriorating
shareholder value. Given increased management accountability, the sizable cash flows generated by DJ in the
coming years will be invested more to the strategic interests of its businesses and the financial interests of
shareholders.
· There is a secular growth trend in DJ’s Business Publishing unit worldwide. Advertising revenue
growth is driven higher by increased global competition in financial services and the changing savings habits
of western economies. Both have led to more advertising - - Dow Jones/the Wall Street Journal/Barron’s are
poised to take advantage of such growth.

3. Relative Stock Performance
(12/07/84 - Present)
600
500
400
300
200
100
-
12/07/84
7/05/85
1/31/86
8/29/86
3/27/87
10/23/87
5/20/88
12/16/88
7/14/89
2/09/90
9/07/90
4/05/91
11/01/91
5/29/92
12/25/92
7/23/93
2/18/94
9/16/94
4/14/95
11/10/95
6/07/96
1/03/97
Index (Base Year=12/7/84)
*Composite: GCI, KRI, NYT.A, TRB, RTRSY
Composite*
S&P500
DJ
A. Industry Overview
Newspapers - Competition from other forms of the media continues to decrease the role of newspapers
in peoples lives. (Exhibit 1) Volume has grown over the past twenty five years at less than the population
growth of just over one percent. Newspapers have raised prices to compensate for the slow growth, but
continuing price hikes may cut into circulation. Whether daily or weekly, general or financial, newspaper
publishing is a cyclical, mature and slow growing industry without foreseeable change, which has led many
publishers to expand into the electronic media.
Revenues Come From Advertising and Circulation - Advertising consists of classified and retail and is
sold based on the number of lines--linage. Classified is primarily help wanted and real estate, and runs at around
$12.6 billion a year. Classified moves with the business cycle. When the economy grows so does the job market
and realty transactions. Classified provides the highest profit margin whether boom or downturn because of a
significant degree of price inelasticity, which allows papers to mitigate reductions in retail linage by increasing
classified rates.
Retail advertising includes financial, mutual funds, travel, telecommunications services and consumer
products that amount to around $17.5 billion a year. Retailer rates are more elastic than classified; as rates
increase, retailers reduce linage. Since the late 1980s, volume has remained relatively low regardless of the stage
in the business cycle. Retailer bankruptcies, buyouts and consolidations reduced the segment’s advertising.
Smaller companies that advertised in local papers, such as Dow Jones’ community papers, became part of larger
firms advertising regionally or nationally. Specialty retailers were extensively replaced by mass merchandisers
that spend less on newspaper ads. And large department store consolidations reduced advertising demand while

4. giving the merged firm greater bargaining power in negotiating rates. In addition, over the long term,
department stores face stable growth as a result of a high ratio of floor space per capita and a mature market,
which will result in continued low levels of advertising.
More troublesome for newspapers is the fundamental shift in retail advertising to other forms of media.
(Exhibits 2 & 3) Major department stores have moved advertising dollars into local television and radio,
packaged good merchants have increased coupon distribution and other promotional techniques and small
businesses now rely more on shoppers weeklies and direct mail. For retail advertising, the volume will grow
slowly and over the long term remain low while rates, although under increasing pressure, will stay ahead of
inflation.
National advertising, which impacts papers such as the Wall Street Journal and New York Times, has
declined over the past decade, but the trend may be reversed or at least halted by the Newspaper National
Network (NNN). The network provides one stop shopping for advertisers by allowing them to place one order
and receive one bill for all their national advertising.
As revenues from advertising are squeezed, publishers try to compensate with increased prices.
Circulation generates 20 to 25 percent of a paper’s revenues. Until the nineties, increased prices generally did not
reduce circulation beyond the short term. But that trend may change.
Costs Caused By Labor, Newsprint, Ink and Postage - Over the past decade, newspapers have
dramatically increased efficiency by modernizing, automating and restructuring while cutting costs by reducing
personnel, restraining bonuses and limiting wage increases, which resulted from reduced labor union bargaining
power. Personnel costs now run between 50 and 60% of expenses or 30% of revenues and grow at about the
inflation rate. Additional cutting, however, appears unlikely.
Newsprint, the special type of paper used by newspapers, accounts for 20 to 30% of expenses. The
newsprint industry is highly competitive and its fortunes depend on the demand generated by newspapers, which
use 70% of the newsprint consumed in North America. Nearly all of the newsprint consumed in the US comes
from North America of which 60% comes from the US, which means newspapers always have the alternative to
buy from overseas markets if newsprint rates increase too much. In addition, newspapers can reduce newsprint
usage to a degree by cutting editorial content, features, page size or width. Furthermore, this smoke stack
industry always builds new capacity at high fixed costs when the business cycle turns up and demand from
newspapers is high only to find that the new plants come on line during the next downturn. As a result, over
capacity continues in the down cycle and the newsprint industry ends up with little bargaining power over
newspapers. For some strange reason, the industry has never learned to limit its building. In the up cycle, the
decline in capacity and increase in demand from newspapers enable the industry to increase rates to a certain
extent. So newsprint booms and busts with newspapers.

5. Some newspaper publishers, such as Dow Jones, have purchased minority interests in newsprint mills in
order to mitigate the cost of newsprint during economic booms. The theory is that when newsprint prices are
high, the paper benefits from an appreciation in the value of its interest in a mill, which, economically, partially
offsets the higher prices. When prices are low, the paper benefits from reduced newsprint costs that more than
offsets the decline in its mill interset. Cash flow from the mill, however, generally remains unchanged since the
newspapers are minority owners and cannot control dividend policies. Newsprint prices do impact newspaper
earnings as recently illustrated when prices fell and paper earnings rose.
Print ink comprises about five percent of a newspaper’s expenses. The industry has five major suppliers
but many smaller independent firms making it competitive with low margins. The key determinant of price is oil,
which essentially makes print ink a commodity subject to the price swings of the market place as opposed to
relative bargaining power between suppliers and buyers. So as raw material prices and demand increase, the
costs are generally passed onto newspapers.
The last significant cost for newspapers is postage, which effects mainly smaller newspapers, such as
Dow Jones’ community papers. Obviously, its the Government that controls postage.
Electronic Commerce - Electronic commerce essentailly entails the transfer of information using
telecommunications and computers. It includes quotation and trading services, provision of financial and market
data and the internet. Organizations and people that use computers to transmit, receive and process essential
commercial information realize cost savings and increased productivity. Until recently, electronic commerce
consisted mainly of the automated transmission of business related information, such as Bloomberg, Telerate and
Reuters. The real time financial information services market size is around six billion dollars and expected to
grow at 6.7% a year. Business information and transactions are expected to shift to the internet when data
security and integrity problems are solved. Other business concerns about the internet include slowness and
ineffective advertising. But by 1999, eighty-two percent of America’s major corporations are expected to be
using the internet. Electronic publishing on the internet is expected to grow by 190% and telecommuting by
170%. The entire electronic commerce market is expected to grow at a 20% yearly clip.
Newspapers Want In - Publishers are moving into electronic commerce in the hope of boosting their
business by leveraging their traditional strengths of providing information in this newer and faster growing
market. Products include electronic versions of newspapers that also allow viewers to focus on narrowly defined
topics, newspaper archives, market data and trading. Newspapers need to explore the new electronic markets or
face losing their core business to telephone, television or computer firms. The markets, however, are very
competitive, not clearly defined and there exists numerous unquantifiable risks. In addition, current investment
costs to enter and effectively compete are high.
Broadcasting - Television continues to cast its magnetic appeal across the entire age spectrum. As the
youth culture and mature information seekers continue to increase their use of the electronic media for

6. information, publishers, such as Dow Jones, are setting up networks and producing programs. Expansion into
TV became feasible when Congress deregulated the industry last year. However, the open market has attracted
powerful competitors, such as the telephone companies, and led to the formation of large firms through
consolidation. The economics of the reinvented broadcast market encourage increased size in order to compete
for programming, advertising and audiences. Industry trends include long range growth in advertising (at a
compound rate of 5.4% since 1989), high prices for TV stations and erosion of the audiences of the three
original networks.
B. Company Overview - The Dow Jones Businesses
Dow Jones is best known for publishing The Wall Street Journal in its U.S., Asian and European editions,
and for the worldwide stock market intelligence it provides. The popular reputation of Dow Jones as one of the
premiere publishers of business news, information services and community newspapers came almost 100 years
after it was founded in 1879. More recently, though, Dow Jones has been propelled by technology and customer
demand deeper into the hyper-competitive information services industry. Management at Dow Jones has stated
that its mission is to be “The premier publisher of business news and information in every form of media.1”Dow
Jones’ ability to fund and drive growth in financial information services while supporting steady growth in its
core newspaper/publishing franchises forms the backbone of the “Dow Jones Story” in this analysis, and is a key
driver behind the recommendation on DJ stock.
As of 1997, Dow Jones & Company is comprised of three operating segments: (i) Business Publishing,
(ii) Financial Information Services, and (iii) Community Newspapers. A review of each business segment and its
respective influence in DJ’s aggregate profitability, competitiveness and growth follows.
Dow Jones Segments at-a-glance2
($000,000’s) 1994 1995 1996 1997(e) 1998(e)
Business Publishing Revenue 961.4 1,049.5 1,214.3 1,244.8 1,308.7
Business Pub. Op. Margin 16.4% 9.1% 13.1% 15% 14.3%
Financial Info. Services Rev. 877.4 961.4 979.7 992.8 1,004.8
Fin. Info. Services Op. Margin 20.9% 20.5% 15.9% 11.8% 11.5%
Community Newspapers Rev. 252.2 272.9 287.5 293.3 301.0
Comm. Newspaper Op. Margin 14.3% 12.1% 15.2% 16.1% 14.7%
Business Publishing
Business Publishing is built around three “publishing” vehicles and in 1996 accounted for 48.9% and
47% of Dow Jones’ revenues and operating income respectively. First, there are the actual newsprint
publications including The Wall Street Journal, Barron’s, the Far Eastern Economic Review and SmartMoney.
1 From Schroder Wertheim & Company Research on Dow Jones & Company, dated 27. January, 1997
2 All of the “at-a-glance” exhibits are derived from research reports on Dow Jones & Company from Schroder Wertheim & Company
(27. January, 1997) and Merrill Lynch Capital Markets (16. December, 1996).

7. The Wall Street Journal, the flagship of Dow Jones Business Publications, has circulation of approximately 1.8
million and provides the lion’s share of revenue to this segment. Profitability drivers for DJ’s publications
include the circulation growth rate, which has stabilized for the WSJ over the past several years, general,
classified and financial (linage) advertising, aggregate macro-economic growth and newsprint costs. In general,
operating margins have been falling gradually from highs near 30% in the 1980’s to the high teens/low 20’s (%)
currently. Most recently, revenues and profits have been boosted by the strength of the overall economy,
stronger advertising and lower newsprint costs, however, there is no guarantee that these favorable conditions
will persist. Growth is projected to stabilize to 5% going forward.
Second, there are Dow Jones’ Business Information Services including new services such as The
Interactive Wall Street Journal (and others). The Interactive WSJ currently has a subscriber base of 70,000 with
an additional 150,000 subscribers obtaining discounted access through the Microsoft Network. In addition, WSJ
Interactive has over 40 advertisers paying $15,000 - $20,000 per month. Management projects that his segment
will become increasingly profitable and is a source of future growth for the Business Publishing segment as its
subscriber and advertising base grows.
Third, there are Dow Jones’ recent efforts to extend its strong print franchise into the broadcast
marketplace. Dow Jones currently broadcasts (TV) through European Business News, Asia Business News, the
Dow Jones Investors Network and the recently purchased New York Station, WBIS, which is focused on news
and sports. Aggregate losses from these operations are projected to be ($40 million) in 1997 and to decrease
steadily going forward. Dow Jones expects to achieve profitable growth from these segments within the next 5
years.
Business Publishing at-a-glance
1992 1993 1994 1995 1996 1997(e) 1998(e)
Print Publishing Revenue $781 $826 $861 $912 $1,049 $1,135 $1,216
Print Pub. Op. Income $115 $164 $171 $129 $180 $210 $230
Business Info. Svc. Rev. $73 $83 $99 $138 $165 $185 $210
Bus. Info. Svc Op. Inc. $15 $16 $16 $13 $19 $23 $25
TV Losses 0 ($20) ($28) ($38) ($40) ($40) ($30)
Business Publish. Rev. $885 $908.3 $961.4 $1,050 $1,214 $1,320 $1,425
Business Publish. Op. Inc. $130 $160.1 $157.4 $95.5 $159.4 $193.0 $225.0
Financial Information Services
Dow Jones Financial Information Services is comprised primarily of Telerate and Dow Jones News
Services and in 1996 provided 39.4% and 46.2% of corporate revenues and operating income respectively3.
DJ/Telerate, which provides 85% of FIS revenues, is a global provider of real time financial information services
3 FIS also includes services such as DJ Capital Markets Report, Asian Equities Report and AP-Dow Jones wire service.

8. and competes primarily with Bloomberg and Reuters within the financial community. Simply put, Telerate is the
weak link in Dow Jones’ Overall outlook.
Telerate was acquired via six stock purchases beginning in August 1985 and ending in December 1989
for a total of approximately $1.64 billion. In 1990, revenue growth at Telerate slowed and its operating margin
dropped from 31% to around 14%. Management was able to boost operating margins back to just under 20%
by 1995, however, such gains are less significant because of two factors. First, Telerate’s 1995 EBITA of $187
million (its peak since 1989) was only 11.4% of Telerate’s purchase price - arguably not materially higher than
Dow Jones WACC - and may represent the only year that Dow Jones earned its cost of capital on the $1.64
billion investment. Second, this growth was accomplished by raising prices and under-investing in resources and
new product development. For example, consider Telerate’s 1996 R&D investment vis-a-vis its peers: Reuters
invested $300 million and Bloomberg invested $250 million while Telerate invested only $33 million.
Dow Jones recently announced its intention to invest $650 million in Telerate, in addition to current
capital / R&D expenditures, between 1997 and 2000. Dow Jones’ premise is that it wishes to become a full-service
information vendor, and a long-term alternative to the services provided by Reuters. Dow Jones
commitment to this business at this point in its competitive life cycle, however, seems to have dubious benefits
for DJ shareholders. An explanation follows.
First, management intends to develop a new network based on standard Internet protocols and to shut-down
its old, page-based system by the year 2000 as a means to re-capture market share. This new network is
supposed to significantly facilitate new product development which will drive higher quality services and new
content competitive with Reuters. Consensus is that Telerate will find it extremely difficult to complete a
transition of 80,000 - 100,000 screens (old system) over a four year period. “Strike one”: the plan seems
extremely optimistic.
Second, in pursuit of becoming a “full-service” provider of financial information, Telerate will invest in:
(i) transaction services for treasury bonds and equities, (ii) new historical databases and analytics for buy-side
customers, (iii) elementized data feeds, (iv) risk management services and (v) messaging capabilities4.
Bloomberg and Reuters have both offered and invested in these services for years. Barring the development and
offering of revolutionary products/services, it seems doubtful that these pursuits will enable Telerate significantly
to re-capture or even maintain market share vis-a-vis Reuters or Bloomberg.
Third, current management has established extremely aggressive financial objectives underlying this
program. To Start: management indicates it intends to increase market share from 14% to 17.5% and revenues
from $850 million to $1.3 billion by the year 2000. Given that management projects negative revenue growth in
1997, revenue would need to compound annually at 16% between 1998 and 2000 in order to reach $1.3 billion.
Consider that the market is projected to grow at only 6% annually in this time-frame, and that Telerate’s
4 From Schroder Wertheim & Company Research on Dow Jones & Company, dated 27. January, 1997.

9. revenues compounded at approximately 7.3% between 1990 - 1996 compared to 42% for Reuters and 10.6% for
Bloomberg5. This growth seems implausible. Furthermore, management intends to increase Telerate’s operating
margin to 18%-22% by 2000 from potentially 0%-2% in 1998 (due to investment and re-structuring). Telerate’s
ability to lift EBITA from $0 - $20 million in 1998 to about $240 million in 2000 implies that the level of
investment in the turnaround plan will decline to recent levels - levels which were insufficient to keep Telerate as
a viable long-term competitor in the first place. “Strike two”: this seems out of touch with reality.
Fourth, the plan doesn’t address competitive and fundamental customer business issues that will impact
the roll-out of any new services at Telerate. For example, the fact that customers are generally pleased with the
services provided by Bloomberg and Reuters vis-a-vis Telerate, and that the universe of potential customers is
shrinking commensurate with consolidation in the banking industry. In addition, there would be switching costs
for customers and there are almost certainly habit formation issues on behalf of current users of Reuters and
Bloomberg. Finally, Telerate will be extremely vulnerable to pressures created by Bloomberg and Reuters. For
example, the fact that they (Reuters/Bloomberg) will continue to use competitively priced, multi-year contracts
to secure ongoing business. While these are not as strong as the arguments outlined above, they take us a good
part of the way towards “strike three.”
Financial Information Services at-a-glance
1992 1993 1994 1995 1996 1997(e) 1998(e)
Telerate Revenues $622 $660 $742 $817 $830 $850 $950
Telerate Operating Inc. $103 $106 $142 $155 $112 ($10) $0
News Wire Services Rev. $114 $119 $136 $144 $150 $160 $175
News Wire Svc Op. Inc. $32 $35 $41 $42 $44 $50 $57
FIS Revenues $735.
9
$778.
9
$877.
4
$961.
4
$979.
7
$1,010 $1,125
FIS Operating Income $135.
0
$141.
0
$183.
1
$197.
0
$155.
8
$40.0 $57.0
Community Newspapers
Community Newspapers is comprised of Ottoway Newspapers, a chain of 19 general interest daily
newspapers with a circulation of 575,000. In 1996 Community Newspapers provided 11.6% and 12% of Dow
Jones’ revenues and operating income respectively. As with Business Publications, growth in this segment is
driven by Circulation, Advertising and Linage revenues and aggregate macro-economic conditions, and
profitability is impacted by newsprint costs. These factors helped account for a 33% gain in operating income in
Community Newspapers between 1995 and 1996. Management has made it clear in numerous meetings with the
analyst community that Community Newspapers is not central Dow Jones’ mission to be the premiere publisher
of business news and information across all media.
Community Newspapers at-a-glance
5 Ibid.

10. 1992 1993 1994 1995 1996 1997(e) 1998(e)
Revenues $234.
7
$244.
6
$252.
2
$272.
9
$287.
5
$301.0 $315.0
Operating Income $31.7 $32.6 $36.2 $33.0 $43.8 $47.0 $52.0

11. C. Valuation Assumptions
Revenue Growth - Stays constant at 6.5% over all three stages
Dow Jones total revenues are broken down into three distinct sources for growth: advertising,
circulation, and financial information services revenue.
Advertising - projected 6% over next ten years (3% in linage growth & 3 % in advertising rates)
Advertising is a cyclical component of revenue for newspapers. The fluctuations in revenue are mainly a
result of the variability of linage growth in response to economic conditions. In general, weaker economic
conditions cause a decrease in advertising revenue and stronger economic conditions result in increased
advertising. At Dow Jones’s flagship publications, the Wall Street Journal and Barrons, total linage consists of
classified (10%), financial (35%), and national (55%). These proportions of total linage are quite different than
other Newspapers where linage usually consists of classified (20-30%), financial (10%), national (20-30%), and
local (30-50%).
National Advertising Linage: Average four percent growth over next ten years
During the mid to late eighties, Dow Jones flagship publications, the Wall Street Journal and Barron’s, national
advertising spending declined due to their lack of color capabilities. During the 1990’s, to recapture lost national
advertising, Dow Jones invested in the Publications to be able to provide color for their flagship publications.
Color capabilities were realized during 1996 helping boast advertisement revenues by 18%. Due to the recent
color addition, Dow Jones should regain lost market share in national advertising allowing the firm to maintain
historical national advertising linagee growth of four percent throughout the next ten years.
Financial Advertising Linage: Average three percent growth over total economic cycle
Financial linage consists of tombstones, image advertising for banks and brokerages, and promotions for mutual
funds. Prior to 1987, financial linage grew at and average growth rate of 6.2%. However, after the market crash
in 1987, financial linage decreased significantly. The drop off in financial linage were due to the following events
(a) severe cost pressures and consolidation in financial services industry. (b) collapse in the Hi-Yield debt
market reduced M&A, (c) reduced mutual fund industry advertising due to the retrenchment of the individual
investor. Since, 1995 financial linage has grown at above historical rates due to robustness of the economy.
Therefore, we assume that over the next ten years (complete economic cycle), financial linage growth will
average three percent.
Classified Linage: Average three percent growth over total economic cycle
Classifieds linage similar to financial linage is directly related to the current economic cycle. However, a small
portion of total linage at the Wall Street Journal and Barrons is related to classified revenue. Over a complete
economic cycle we assume classified linage to remain constant.

12. Over the past 15 years advertising rates have been relatively flat fluctuating in the lower single digits.
Dow Jones future advertising rates will track historical trends and see growth at around three percent.
Dow Jones Business Informations Group: Increased contribution to revenues in the near future
Dow Jones is currently in the early stage of television ventures in United States, Asia, and Europe which are
expected to contribute to revenue growth in the beginning of the 21st century. In addition, losses are expected in
near term for the U.S. television venture, WBIS+, a sports and business programming network. However,
similar to their international segment, revenue growth is expected to be realized in the near future.
Dow Jones Interactive Publishing: Increased subscription rates will provide additional revenue
Delivery over the Internet of the Interactive Journal was limited to paying subscribers in the latter part of
1996. At the end of 1996, the edition had 90 advertisers up from 12 advertisers in the beginning of the year.
Circulation - Projected at 5% over the next ten years
The two components of circulation growth are unit circulation and subscription price.
Due to increased competition from other business new media, print, and electronic, Dow Jones has
experienced flat circulation growth in the Journal and Community Newspapers and modest growth of 2.5% at
Barrons. Therefore, all growth in circulation revenue will come from increases in subscription and newsstand
prices. We expect circulation growth of 1-2% and subscription and newsstand prices to increase at the expected
inflation rate of 3-4%.

13. D. Model
Explicit assumpitons
The following inputs for the FCFE model were obtained by averaging the assumptions that were stated in the
previous section.
Background
Current Information
· Earnings per share = $1.21
· Capital Spending per share = $3.40
· Depreciation per share = $2.50
· Revenues per share = $27.11
· Working Capital as percentage of revenues = 32%
Inputs for high-growth
· Lenth of high-growth period = 4 years (Length of CapX plan for Telerate)
· Expected growth rate in earnings during this period = 25.20% (Based on depressed earnings)
· Capital Spending will grow at 1.3%.
· Depreciation will grow at 6%.
· Revenues will grow at 6%.
· Working Capital will remain at 32% of revenues.
· Beta for high growth will be .88.
· Risk free rate of 7.19%
· Risk Premium of 5.5%
Inputs for transitional period
· Length of the transition period = 5 years
· Growth rate will decline from 25.2% in year 4 to 6.5% in year 10 linearly.
· Capital Spending, Depreciation, and Revenues, will grow at 6%.
· Working Capital will remain at 32% of revenues.
· Beta will slowly shift back from .88 to .85.

14. Inputs for stable-growth period
· Earnings will grow at 6.5% a year in perpetuity.
· Capital expenditures will equal 6%.
· Depreciation will equal 5%.
· Debt ratio will remain at 20%
· Beta for the stock will be .85
E. Valuation Conclusion
Using the FCFE model, we calculated an intrinsic value of $44.82. Based on the current stock price of
$39.63, Dow Jones is currently undervalued and therefore a BUY.
Relative Models -- Adding a Historical and Comparable Perspective
As discussed in the last section, both the P/E and P/BV models indicate that Dow Jones should be bought
since the theoretical P/E and P/BV ratios are higher than the actual ratios. Clearly, this recommendation is the
most important conclusion that can be derived from the relative models. Nevertheless, it is often helpful to look
beyond the theoretical models and get a sense of whether the company is trading cheap or expensive compared
its historical trading levels. Furthermore, a comparison to comparable companies provides the perspective of
whether the company is likely to outperform or under-perform other investment opportunities.
Let’s begin with an examination of the historical trading values of Dow Jones. Using historical First Call
earnings estimates (obtained through a database called Factset), the price to two-year forward earnings ratio
(“P/E ratio”) is shown in the following graph.

15. Price/2 Year Forward Earnings
28.0
26.0
24.0
22.0
20.0
18.0
16.0
14.0
12.0
10.0
3/90
8/90
1/91
6/91
11/91
4/92
9/92
2/93
7/93
12/93
5/94
10/94
3/95
8/95
1/96
6/96
11/96
P/2 Year Forward Earnings
It is clear from the graph that Dow Jones is relatively expensive on a P/E basis at about 27x 1998 earnings,
compared to its historical range of 15-21x earnings. However, such an analysis is misleading since it ignores
possible changes in the underlying fundamentals of the company -- particularly the estimated earnings growth
rate. The historical relationship between the P/E ratio and the projected growth rate is shown below (historical
projected growth rates were also provided by Factset).

16. P/Forward Earnings Versus
5 Year Estimated Growth Rate
30.00
25.00
20.00
15.00
10.00
5.00
0.00
1/91
5/91
9/91
1/92
5/92
9/92
1/93
5/93
9/93
1/94
5/94
9/94
1/95
5/95
9/95
1/96
5/96
9/96
1/97
5 Year Estimated Growth Rate
30.0
25.0
20.0
15.0
10.0
5.0
0.0
P/2 Year Forward Earnings
P/Forward Earnings
Estimated Growth Rate
The graph illustrates that the growth rate has actually increased to over 25%, thereby justifying the higher P/E
ratio. The increase in both the P/E ratio and the growth rate is the result of unusually low earnings estimates
projected for the next few years caused by the restructuring of Telerate. In turn, the lower earnings base
provides for faster growth. To account for changing projected growth rates, the graph below shows the ratio of
P/E over the historical estimated five year growth rate. It is clear from the recent downturn that Dow Jones is
relatively cheap in comparison to its historical trading levels.

17. 5 Year Estimated Growth Rate
P/E Ratio Divided By
-
0.50
1.00
1.50
2.00
2.50
3.00
1/91
5/91
9/91
1/92
5/92
9/92
1/93
5/93
9/93
1/94
5/94
9/94
1/95
5/95
9/95
1/96
5/96
9/96
1/97 A similar historical analysis is also provided for P/BV. The following graph illustrates the historical P/BV
ratio, which indicates that the company is relatively expensive on a P/BV basis in comparison to its historical
trading level.
Price/Book Value
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
2.80
3/90
8/90
1/91
6/91
11/91
4/92
9/92
2/93
7/93
12/93
5/94
10/94
3/95
8/95
1/96
6/96
11/96
P/BV
However, this conclusion ignores underlying changes in return on equity. The relationship between ROE and
P/BV is provided below.

18. P/BV Versus ROAE
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
3/90
8/90
1/91
6/91
11/91
4/92
9/92
2/93
7/93
12/93
5/94
10/94
3/95
8/95
1/96
6/96
11/96
P/BV
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
ROAE
P/BV
ROAE
As the ROE has increased in recent years, the company has experienced only a slight increase in P/BV. As a
result, as shown in the graph below, the ratio of P/BV divided by ROE indicates that Dow Jones is relatively
cheap on an adjusted P/BV basis in comparison to its historical trading levels. (Since it was not practical to
determine the historical cost of equity for Dow Jones, we did not adjust historical P/BV for it. Nevertheless,
P/BV divided by ROE can be thought of as a “Value Ratio” before the cost of equity.)

19. P/BV Divided By
ROAE
0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
3/90
8/90
1/91
6/91
11/91
4/92
9/92
2/93
7/93
12/93
5/94
10/94
3/95
8/95
1/96
6/96
11/96
Having analyzed the company’s relative trading levels over time, let us now turn our attention to the
relative trading levels of Dow Jones versus other possible investments. The question that needs to be answered
is whether Dow Jones is relatively expensive in comparison to other investments. This reveals how likely it is for
an investment in Dow Jones to outperform comparable investments. The following table provides an analysis of
the relative trading values of Dow Jones versus the S&P500 and other publishing/information services
companies.
DJ Versus Other Investment Opportunities
DJ Gannett NYT Tribune K-R Reuters S&P500
Fundamentals:
5 Year Growth Rate % 25.2 9.0 16.5 15.3 11.3 15.0 4.0
Dividend Payout Ratio % 49.0 32.5 69.0 27.9 29.1 37.8 39.2
Beta 0.9 0.9 0.8 1.0 0.9 0.6 1.0
Cost of Equity % 11.7 12.2 11.1 12.6 12.2 10.4 12.5
Profit Margin % 7.7 14.1 3.2 11.8 9.7 16.9 NA
Asset Turnover 0.9 0.7 0.8 0.7 0.9 1.5 NA
ROA % 7.1 9.3 2.4 8.5 9.1 25.0 NA
Financial Leverage 1.7 2.2 2.2 3.1 2.6 2.3 NA
ROE % 12.0 20.2 5.3 26.3 23.2 56.6 22.2
Actual Forward PE Ratio 25.6x 16.7x 16.9x 17.5x 15.2x 15.5x 16.6x
Risk Adj. PE/Growth Rate 0.9x 1.7x 0.8x 1.2x 1.3x 0.6x 4.1x
Actual P/BV 2.2x 4.0x 2.5x 4.4x 3.1x 10.3x 4.3x
Value Ratio 7.7x 0.5x (0.4x) 0.3x 0.3x 0.2x 0.4x

20. Looking first at the P/E ratio, it appears that Dow Jones at 25.6x 1998 earnings is relatively expensive in
comparison to comparable investments trading in the P/E range of 15-18x. However, as discussed earlier, you
need to adjust for differences in the fundamentals of the companies. In particular, the growth rate of Dow Jones
has recently increased due to unusually low base earnings caused by Telerate expenses. After making
appropriate adjustments, the risk adjusted P/E ratio divided by the estimated five year growth rate indicates that
Dow Jones at 0.9x is fairly valued (and perhaps even slightly cheap) in comparison to comparable companies
trading in the 0.6-1.7x range. Moreover, Dow Jones is relatively cheap in comparison to the S&P500 (which we
consider to be generally overvalued), which trades at an adjusted multiple of 4.1x.
Looking at the actual P/BV ratio, it is possible to conclude that Dow Jones is relatively cheap at 2.2x
book value versus comparable investments in the 2.5-10.3x range. However, such a conclusion would be wrong
because differences in the underlying fundamentals must be considered -- particularly the ROE and cost of
equity. Therefore, we instead focused on the Value Ratio which indicates that Dow Jones is relatively expensive
at 7.7x versus a Value Ratio for comparable investments generally in the 0.2-0.5x range (excluding the New
York Times). This appears to be a reasonable conclusion given that the ROE for Dow Jones is only 12% versus
comparable ROEs generally in the 20-26% range (excluding the New York Times and Reuters).
In summary, we have made several observations regarding relative trading levels for Dow Jones. First, it
appears that the company is relatively cheap in comparison to it historical trading levels on both an adjusted P/E
and adjusted P/BV basis. Furthermore, not only is the stock cheap from a historical perspective, but it is also
cheap in comparison to the S&P500 -- based primarily on the adjusted P/E to growth ratio. Therefore, we
believe that it is likely that Dow Jones will outperform the market index.

21. Sources
Standard & Poor’s Industry Surveys
Hoover’s Handbook of American Corporation
Bloomberg
Value Line
American Management Association
Encyclopedia of American Industries
US Statistical Abstract
Various Research Analysts Reports

22. Exhibit 1:
Time Spent with Media
(Average minutes per Day)
1989 1994
Television 244 258
Radio 190 181
Recorded Music 36 48
Newspapers 29 28
Books 16 17
Magazines 15 14
Home Video 6 9
Home Video Games 2 4
Movies in Theaters 1 2
Internet 1 1
Exhibit 2:
Advertising Media: % Shares of the Market
Media 1987 1988 1989 1990 1991 1992 1993 1994 1995
Newspapers 26.8 26.4 26.1 25.3 24.1 23.1 23.2 22.6 22.3
Magazines 5.1 5.1 5.4 5.3 5.2 5.4 5.3 5.4 5.4
Television 21.8 21.8 21.4 21.8 21.6 21.8 22.1 22.1 22.6
Radio 6.6 6.6 6.7 6.7 6.7 6.8 6.8 7.1 7.1
All Other 39.7 40.1 40.3 40.9 42.5 43 42.5 42.9 42.7
Total 100 100 100 100 100 100 100 100 100
National 55.3 55.6 55.7 56.6 57.4 58.1 57.9 58.8 58.8
Local 44.7 44.4 44.3 43.4 42.6 41.9 42.1 41.6 41.2
Total 100 100 100 100 100 100 100 100 100
Exhibit 3:
1994 1995 1996
Newspaper Ad Revenue (million)
National 4000 4120 4350
Retail 17560 18230 19430
Classified 12625 13890 14500
Total 34185 36240 38280
Television Ad Revenue (million)
Broadcast
Network 11893 12402 13750
Syndicated 2358 2317 2500
Local 6313 6608 7150
Spot 6580 6586 7060
Total 27144 27913 30460
Cable 4670 5210 6037
Total 31814 33123 36497