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March 31, 2008

Newspapers Final 2007 Data As Ugly As Expected

Last Friday, the Newspaper Association of America released its 4Q07 and full year 2007 advertising expenditure data. Not surprisingly, the NAA titled its press release, "Online Advertising Jumps 19 percent in 2007." The only problem with headline is that online advertising represented just 7.5% of all newspapers ads last year. Print advertising, which represents the other 92.5%, fell 9.4% last year, bringing total newspaper advertising to a decline of 7.9%.

Among the major ad categories, retail, the largest category representing half of print ads, faired the best, falling 5%. National ads, about 17% of total ads, fell 6.7%. The big damage was in classified advertising, largely a local business, which had a massive decline of 16.5%.

Classified advertising is composed of automotive, real estate, help wanted, and other. The news is the first three categories is terrible. Auto fell 18.3%, real estate fell 22.6%, and help wanted fell 19.8%. Auto fell for the fourth straight year with each year's decline larger than the last. This category clearly is facing secular challenges. Real estate had been a strong growth category prior to the subprime mess so while it also faces secular share loss tot the internet, it should return to growth when real estate markets improve. Help wanted also has a significant cyclical element although the secular challenge is real. 2007 marked the second straight year of declining help wanted advertising.

Quarterly trends show little hope....

.... Auto might be bottoming as its rate of decline moderated from 20% in 1Q07 to 16% in 4Q07. However, the rate of decline in real estate and help wanted accelerated as the year passed.

Newspaper stocks have been absolutely decimated. Gannett, the acknowledged best in the business, saw its stock cut in half in 2007. The shares now trade at on-third of their 2004 price. McClatchy, which doubled down by buying Knight Ridder in a leveraged transaction is trading at $10, down form over $40 at the start of 2007 and over $70 in 2005. New York Times fell by just 30% last year but trades at about one-third of its 2004 high. Takeover speculation allowed NYT shares to hold up a bit better in 2007.

Among these three stocks, the only one worth worrying about as a potential long is Gannett. The stock looks cheap at 7 times 2008 earnings estimates and a 5.5% current yield. However, it won’t stop falling until estimates stabilize and in the last 90 days the 2006 estimate has fallen from $4.46 to $4.16. Consensus is calling a 7% decline in 2008 earnings followed by a 4% drop in 2009. I think Gannett will stage a tradable rally from the long side once the momentum of advertising declines reverses. Not growth but a significant lessening of the decline. No reason to own it now worth putting on your screen and monitoring the monthly ad trends that the company and industry reports.

Posted by Steve Birenberg at March 31, 2008 04:27 PM in Newspapers