Goldman Sachs: Newspaper Stocks in Limbo

By: E&P Staff

The state of newspaper stocks is up in the air as the second half of the year plays out. For now they are in the “tweener stage” — the term Goldman Sachs uses to describe how stocks are too expensive to attract widespread attention and not developing fast enough for investors seeking growth.

Large-cap stocks, year-to-date, are down 7.2%, far below the S&P 500, down 1.4%. That said, newspaper stocks continue to trade in the top half of their historical EBITA valuations “suggesting further potential downside in the group absent strong trends in ad revenue,” the Goldman report said. One of two things will have to happen to goose stocks: a sustained ad recovery or a 10% decline in current stock prices.

The investment firm reported that second quarter newspaper ad revenues increased 5.6%, as expected. But classified advertising accounted for most of the rise at 8.3% while retail and national wheezed along at 2.6% and 4.8% growth respectively. July will most likely be soft, especially as national advertising continues to decline. On top of it, retailers are expected to have weaker sales in the upcoming months.

On the upside, it’s unlikely that the proposed $50/ton price increase by Abitibi and Bowater will take effect Sept. 1. Advertising has been soft and newspaper companies are well stocked with paper inventory. The firm thinks that increase won’t take affect until November or December “at the earliest.”

Newspapers will turn towards labor for some efficiency. Industry employment will be down close to 1% in 2004, with average salary increases in the 2% range, the report predicts.

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