The Old Gray Lady is looking a lot younger these days.

Less than five years after desperately needing a costly $250 million capital infusion from Mexican billionaire Carlos Slim, The New York Times Co. (NYSE: NYT) has staged a remarkable rebound. Shares have nearly doubled in the past two years, handily surpassing the S&P 500 Index. Rival Gannett (NYSE: GCI), publisher of the USA Today, has fared even better.

Give credit where it’s due. These companies took a machete to their expense structures, and they now appear to be on much more solid operational footing. Here’s a quick snap shot of the Times’ income statement in 2007 and 2012.

More than a third of the Times’ revenue base has dried up (though a few asset sales also shrank revenues). But a tight control on costs and a huge cutback in capital spending has enabled the newspaper publisher to generate positive free cash flow. The company has even reinstated a modest dividend after getting rid of it back in 2008.#-ad_banner-#

The turnaround for Gannett hasn’t been quite as impressive, and its share price gains are only so robust because shares were so depressed a few years back. The company’s flagship newspaper continues to see advertising declines, though Gannett’s network of TV stations has helped maintain cash flow during the era of print weakness.

But it’s The New York Times that should really be seen as a proxy for this group. The publisher has always been seen as possessing the strongest brand in the business, and you need to look at the Times’ road ahead to see whether newspapers are regaining their relevance, as the surging price of NYT seems to indicate.

The short answer: It’s too soon to give the company — and the industry — a clean bill of health. The key culprit: Ad revenues have yet to hit bottom.

As a recent Bloomberg article notes, The Times’ ad revenues fell in the third quarter to the lowest level in at least 15 years. Price hikes for print editions and a still-growing base of digital subscribers partially offset those declines. For the first time in its history, the Times now gets more revenue from subscriptions than advertisements.

The ongoing compression in ad sales explains why the Times’ revenue base is on pace to fall 12% this year (with half that attributable to the sale of the Boston Globe), and fall another 6% in 2014. Consensus per-share profits of around $0.40 in 2014 would be nearly 10% lower than 2012 levels and a fraction of the $1.50 to $2 a share this company earned a decade ago.

Of course the real measure of the future for this and other publishers is the growth in digital subscribers, and by that measure, the Times is still growing. Online subscriptions grew 28% in the third quarter from a year ago, but ad revenues against that higher customer base actually shrank 3%. Translation: Ad revenues per eyeball are dropping fast.

	Flickr/James Duncan Davidson
	Amazon.com’s Jeff Bezos paid $250 million for The Washington Post.

Yet that’s not the greatest source of my concern. Instead, it is that print circulation keeps on dropping (along with print ad revenues). Though the company doesn’t break out profits or losses for the newspaper, industry analysts think the NYT loses money when printing and delivery costs are accounted for. That leads to an inevitable question: Will management feel compelled to shutter the money-losing print division and become a purely online platform?

That’s a decision already being mulled by the U.K.’s The Guardian, the world’s third-largest English-language newspaper, according to a recent article in The New Yorker magazine. And if that was the case, is an online-only platform worth the current $2 billion market value?

To put the Times’ market value in perspective, Amazon.com’s (Nasdaq: AMZN) Jeff Bezos paid $250 million for the Post.

The News Corp. Transformation
Although News Corp. (Nasdaq: NWSA), publisher of The Wall Street Journal, Barron’s and other newspapers faces many of the same secular challenges at the Times, the company appears to have many more levers at its disposal to boost margins and cash flow, even in the face of stagnant revenues.

Since the publishing division was spun off in June, its management team has been repeatedly articulating a clear message to analysts: Money is being spent this year to streamline each print product now, which sets the stage for better performance in the years ahead. A quick peek at UBS’ earnings model summarizes the emerging profit outlook for News Corp.

 One of the reasons that analysts expect News Corp.’s revenue base to remain stable is its exposure to financial publishing, which is seen as a steadier platform than general news.

Meanwhile, shares of News Corp. have only traded up modestly from the $15.50 offering price in late June to a recent $18. Notably, more than half of the company’s current $10.4 billion market value is reflected in its net cash balance of $5.25 billion. As long as the company continues to generate positive earnings before interest and taxes (EBIT) and free cash flow, a big stock buyback may be a wise move.

Risks to Consider: All of these publishers must still prove their mettle in an online world. If one or all of them decide to stop producing their print profits and go all-digital, then the financial targets noted above will no longer be accurate.

Action to Take –> The impressive rebound in shares of the New York Times and Gannett reflects a perception that these companies have survived a death scare. But there is little reason for optimism for the periods ahead. In contrast, News Corp. appears to have more paths to cash flow growth, despite its relatively tepid trading performance after its spin-off. That makes this the relative bargain of the group.

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