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September 15, 1997 01:00 AM

READ ALL ABOUT IT! TABS' STOCKHOLDERS STAY LOYAL

Ricki Fulman
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    Inquiring minds want to know: Will loyal shareholders abandon American Media Inc., publisher of the National Enquirer and the Star, in the recent backlash against tabloids after Princess Diana's death last month?

    Not to worry. The Lantana, Fla.-based media company continues to be a darling with its major stockholders, who said any dip in circulation would be only temporary.

    The week of Sept. 1, directly after Princess Diana died in a Paris car crash, several big U.S. retailing chains yanked the Enquirer and privately held Globe off of the shelves, because they considered some of the tabloids' stories on the princess inappropriate and offensive. The Sept. 5 Enquirer, for example, which was printed before her death, featured a "Di goes sex mad" story on its cover.

    News that thousands of copies of the Enquirer had been pulled caused American Media's stock price to slip slightly to 715/16 a share Sept. 3. But by Sept. 8, the price already had started to climb back to the 81/4 level it had been trading at before the uproar.

    On Sept. 11, the stock rose 1/8, to close at 83/4.

    Analysts and shareholders emphasized consumers are enthralled with personality journalism and are unlikely to stop reading tabloids.

    "It's unlikely many people will change their reading habits over this," said John Reidy, media analyst at Smith Barney Inc., New York.

    "If circulation dropped sharply, it could be a problem, but I doubt that will happen. The company has a lot of cash. Its net income doubled in the quarter."

    Donald Yacktman, chief investment officer at Yacktman Asset Management Co., Chicago, owned 1.5 million shares of American Media as of June 30.

    "The removal of the tabloids was a short-lived event," Mr. Yacktman said.

    "The company faced a much bigger challenge during the O.J. Simpson trials last year," he said. "People began to watch more tabloid TV and read less, cutting into circulation. But in general, there is an insatiable market for this kind of celebrity information, and any damage from last week's events is going to be very short term."

    American Media is a very profitable business whose earnings are going up, he added. This dip in circulation could affect quarterly earnings slightly, he acknowledged.

    The stock is cheap, compared with that of other media companies, said John Rogers, president of Ariel Capital Management, Chicago. Using its current price-earnings multiple, Mr. Rogers calculated the stock is selling at 10 times next year's earnings, compared with Central Newspapers Inc., Indianapolis, selling at 17 times next year's earnings and Lee Enterprises, Inc., Davenport, Iowa, selling at 15 times next year's earnings. Both publish traditional daily newspapers.

    "Even if the quarterly earnings are a few cents short, we expect to see good cash flows over the next three to five years," said Mr. Rogers, who owned 6 million shares as of June 30.

    He is very bullish about American Media, and predicted the backlash could be a blessing in disguise.

    Management sees it as an opportunity to make a distinction between the Globe and the Enquirer, he said. The Globe uses tactics that don't meet the Enquirer's standards.

    "The Enquirer has worked hard to make sure their facts are right when they print. They have a real sense of integrity. And they don't want to get sued. They are trying to be a publication whose advertisers will be comfortable," Mr. Rogers explained.

    Thomas Russo, partner at Gardner Investments, Lancaster, Pa., which owned 1 million shares of American Media as of June 30, said he has held the stock for several years. The company is building its advertising market share, which can provide incremental revenue, he noted.

    Company management told him the tabloid backlash has not hurt this effort, Mr. Russo said. Now, 90% of the Enquirer's revenue comes from its 2.5 million circulation.

    The irony is that the Enquirer and People Magazine report on almost identical material. Yet People, which is considered safe by advertisers, sells $300 million in advertising annually, while the Enquirer and Star combined sell around $20 million annually, according to Mr. Russo.

    He hasn't added to his holdings because of concerns that management might not be using the best strategy to enhance shareholder value.

    "The company generates an enormous amount of free cash flow, and how it uses that cash is one of the biggest risks to the stock," Mr. Russo said. "A few years ago, for example, they used it to give shareholders large taxable dividends, when they could have put that money to work buying back the stock."

    Another risk is a decline in general newsstand circulation as consumers have cut back, now buying either the Star or the Enquirer, when they used to buy both.

    But Mr. Russo emphasized the two tabloids have been gaining credibility, after breaking important political stories, such as last year's shocker that President Clinton's chief strategist, Dick Morris, was letting his mistress eavesdrop on conversations with the president.

    "They do very careful research about what their audience wants to read," he said.

    It's been a big year for the Enquirer, added Ariel's Mr. Rogers. "The tabloid was in the forefront of the O.J. trial, digging up original research about his Bruno Magli shoes. It also helped find the man who last January shot Ennis Cosby," actor Bill Cosby's son, Mr. Rogers said.

    In addition, the company has been diversifying, which also will boost the stock, Mr. Rogers said. Last year it successfully launched Country Weekly, a magazine about country and western celebrities, and there are plans for more publications, he said. Mr. Rogers said he plans to hold on to his shares.

    "The stock, already up 42.5% since January, is likely to perform well over the long term, because people love to read about celebrities," Mr. Rogers said.

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