Goldman Sachs’ 2006 Review: Newspapers Did Poorly — In Good Times

By: Jennifer Saba

As the year comes to a close, it will prove to be the first time industry results have not been up to snuff during a healthy economy. In a report issued by Goldman Sachs on Wednesday, analyst Peter Appert and his team wrote, “2006 will likely end as the first non-recession year in newspaper industry history in which revenues declined.”

Goldman predicts that total revenue will sink 0.3% due to weak classified, national, and circulation revenue. If so, it will turn out to be the industry’s worst performance “since the recession-impacted results of 2001,” wrote analysts.

Tribune’s September announcement that it’s seeking strategic alternatives has whipped the market into frenzy. The newspaper sector is up 8.4% compared to an 8.3% gain in the S&P500. Year-to-date the group is down 0.7%. In 2005 it was down 20.5% and in 2004 it dropped 6.1%. The large-cap papers are the ones really benefiting: that group is up 3.7% year-to-date while small-cap papers are down 21.7%.

Should stockholders be encouraged by the rally? Don’t buy into the hype, Goldman warns.

“We continue to advise investors to sell into this recent strength based on our view that deteriorating fundamentals will trump restructuring speculation,” analysts wrote. “While we believe money can be made in ‘special situations,'” — E.W. Scripps and GateHouse Media are rated as “buys” –“we would remain underweight on the group.”

Back to advertising, the crumbling of classified is going to hurt the industry even more. Goldman estimates that in Q4, classified revenue will decline 3.4%. For the full year, it’s expected to dip 0.7%. In 2005 classified revenue grew 4.2%.

One thing publishers won’t have to worry about is the rising cost of newsprint. It seems that prices may be close to an “inflection point” and will decrease.

For those publishers that own TV stations, more good news: the boob tube should boost Q4 earnings per share because of strong political advertising. “We anticipate a media Q4 newspaper EPS gain of 9.8% (versus a 9.0% gain for the S&P 500), the industry’s best performance in several years,” wrote analysts.

But even that won’t hold. In the absence of political and Olympic-related advertising in 2007, expect Q1 to be “extremely challenging.”

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