Minimal Newspaper Ad Sales Growth Expected in Q2 Reports

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As the newspaper sector prepares to report second-quarter earnings this week, analysts are expecting minimal ad sales growth from most media companies, particularly in the national and classified auto arenas.

Advertising sales are historically the bread and butter of most newspapers, but media companies are beginning to learn that diversification is necessary to remain viable in today’s marketplace.

“We expect overall second-quarter newspaper ad trends to mimic the first quarter with strength in real estate and help wanted offset by softness in national and classified auto, leading to flat to modest single-digit ad revenue growth in the quarter,” Bear Stearns analyst Alexia Quadrani said in a July 6 client note.

Merrill Lynch analyst Lauren Rich Fine said in a note Friday that she foresees ad revenue growth being “volatile and underwhelming” through the rest of the year.

Analysts view E.W. Scripps as the one bright spot in the sector. Its newspaper ad sales growth of 6.3 percent far surpassed the industry average of 0.9 percent for the first two months of the quarter. Scripps’ surge is primarily from real estate and help wanted ads, with retail also giving some support, Quadrani said.

Rich Fine said she expects second-quarter ad revenue growth of 1 percent across her publishing coverage, with Scripps as the lone standout with 5 percent or more growth. She recommends the stock with a “Buy” rating, saying Scripps “offers attractive long-term growth at a reasonable price.”

For the sector at large, the analyst predicts an average second-quarter earnings per share drop-off in the low single digits, but added that there will be a wide range of results.

Quadrani said she is still cautious on the sector and does not anticipate May ad sales growth continuing into June, based on publishers’ comments at the Newspaper Association of America’s annual Mid Year Media Review.

The industry is eyeing Internet ads as a way to salvage some of its revenue, but Quadrani predicts it will only produce about 7 percent of total company revenue for publishers this year.

Over the long-term, the sector will be faced with trying to maintain ad market share in its print and broadcast properties “while working to offset ad revenue declines through the growth and development of their online assets,” Quadrani noted.

Quadrani says Gannett Co., which reports Wednesday, should see its newspaper ad sales lifted by growth at flagship USA Today.

Journal Register Co., parent of the New Haven Register, forecast a year-over-year decline in second-quarter profit due to weakness in the Midwest. Quadrani concurs, seeing the Journal’s ad sales falling 2.4 percent for the quarter on continued weakness in Michigan and the Greater Cleveland area.

“We are forecasting Journal Register’s below average top-line performance to continue, which combined with high leverage, keeps us negative on the shares,” Rich Fine said.

Tribune Co. faces softening ad revenue growth and a 4.5 percent drop in circulation sales, Quadrani predicts. The company is looking for cost savings of $200 million over the next two years and must contend with the Chandler Trusts, which are possibly trying to liquidate their position by forcing a breakup or sale of the company, Quadrani explains. The Los Angeles-based family trusts’ 36.9 million shares comprise a more than 14 percent stake of the media company.

McClatchy Co. will likely contend with its $6.1 billion June acquisition of Knight Ridder Inc. for the near future. Standard & Poor’s Ratings Service downgraded the company a day after the deal’s completion, but said McClatchy’s outlook is stable. The ratings agency also said McClatchy is a stronger business following the deal, and expects the company to use most of its discretionary cash flow to pay down about $4.7 billion of outstanding debt in the coming years.

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