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October 05, 2006

Newspaper Industry Outlook Remains Bleak

Newspaper industry fundamentals continue to look pretty bleak. According to Citigroup, August was the worst month so far this year for advertising growth with industrywide year over year declines averaging 1% against an easy comp. In fact, Citigroup states that the ad revenue growth in August was the worst since 2002.

Help Wanted advertising continues to decelerate, with August recording a decline of almost 9%. In 4Q05, help wanted was growing 8-10% so comps stiffen looking out to 4Q06. Real Estate classifieds have also finally rolled over with growth decelerating from 15-20% for the past year to 12% in August. Analysts expect real estate gains to continue to moderate, especially in 1Q07 when they will be comping against 2-30% gains.

Against this backdrop it is not surprising that Merrill Lynch and Morgan Stanley lowered 2006 and 2007 estimates across the board. Morgan went to ad growth of 1% and 1.4% in 2006 and 2007, respectively. Merrill Lynch analyst Lauren Fine, who was below consensus already dropped her ad growth estimates to 0% and -1.5%, respectively. It is worth noting that those estimates include online advertising which is growing at least inthemid-teens at most companies and represents 5-10% of revenues....

Lauren slashed her 2007 earnings estimates by an average of 7% and now sits 10% or more below consensus on most companies. Her estimates for Dow Jones (DJ) and New York Times (NYT) fell by 13-14%, while most other companies saw estimates cuts of 5-8%.

With estimates cuts that deep, the stocks aren’t getting any cheaper even as investors look out to 2007 and in spite of pretty sharp declines for most of the stocks, which all trade close to 52 week lows. The contrarian in me says I should look for opportunity in the stocks when the street finally throws in the towel but I see fundamentals as bleak and don’t believe private equity will be a savoir at big premiums. On Lauren’s news estimates, the stocks are trading at over 8 times 2007 EBITDA. I have a hard time seeing financial buyers developing spreadsheets that support good returns at any significant premium to that multiple. Further, what exactly is the exit strategy once a newspaper company is taken private. You could pretty easily make the case that the terminal multiple should be quite a bit below the takeout multiple.

I remain on the sidelines while keeping a close eye on the developments at Tribune (TRB), which is effectively for sale. E.W.Scripps (SSP), which ahs effectively diversified away from newspapers, and DJ, which has unique content more easily suited to the web, are the two stocks I would be most likely to buy if I decided to enter the group.

Posted by Steve Birenberg at October 5, 2006 01:04 PM in Newspapers