Merrill Lynch to Investors: Be Wary

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By: Jennifer Saba

Looking to invest in newspaper stocks? Merrill Lynch issued a report Friday with the cautionary headline, “Read This First.”

The research firm warned investors who might be tempted by current stock values. Valuations are low — the group underperformed 10% year to date, according to Merrill.
However, the prices are not low enough to justify purchasing, the report said. “They are still too high relative to growth prospects that have deteriorated since they last traded in this range.”

The same holds for the long term. The firm calculated a five-year projection and still came to the same conclusion: “We do not think there are any cliffs on the horizon, but we do see a gentle long-term descent.”

Here’s why Merrill remains guarded: Newspapers are losing advertising share (in 1949 the industry grabbed 39.6% of total ad dollars; by 2004 the share dropped to 18%). Circulation, even discounting recent scandals, is in decline. And while online revenue is promising, that potential will not offset the print decline.

Merrill lowered its full-year newspaper ad revenue forecast based on “four months of data and an uneven economy where we have no real confidence of a second-half resurgence.” In 2005, it estimates 3.3% growth versus 4% growth. In 2006 Merrill predicts 3% growth versus 4% growth.

That said, the firm sees some real upside to the industry including the role that newspapers can play in community journalism, blogs, photo galleries, and new youth- and ethnic-targeted publications.

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