Goldman Sachs: Newspaper Stocks Are Too Much for Too Little

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By: Jennifer Saba

Goldman Sachs’ Peter Appert issued another note today warning investors about the high price of newspaper stocks in light of the industry’s mediocre performance this year. It’s Appert’s view that the newspaper group needs to “correct on average by another 16% before the stocks can be considered ‘value’ stories.”

In the meantime, he describes newspaper stocks as “tweeners” — borrowing the term used to describe the awkward stage before the teenage year. “They’re too expensive to attract widespread attention from value investors, but not growing fast enough to be of interest to growth buyers,” Appert wrote.

There doesn’t seem to be any relief in site either. The lifeless ad environment, lower circulation revenues, and higher newsprint costs are expected to persist throughout the rest of the year. The reversal of those trends would act as catalysts to stock valuations

Further aggravating the situation: Advertising spending is moving away from traditional media — i.e., newspapers — to the Internet. Appert notes that during the Goldman Sachs’ Internet Conference last week, Edward Kim, manager of alternative media for packaged goods at Unilever, said that his company now spends 5% to 10% of its ad budget on the Internet but that it could grow 10% to 15% in the near term. Though packaged goods aren’t a huge category for newspapers, it’s indicative of a wider development, Appert said.

Beyond seeing the stocks cheaper in the context of stable earnings, the report said, Goldman would be more “bullish” on newspaper stocks if there was an acceleration of revenue growth, earnings stabilize or improve, and increased M&A activity. “In the absence of any of the above, we remain on the sidelines.”

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