Moody’s Issues (Another) Negative Outlook for Newspapers

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By: Jennifer Saba

Moody’s Investors Service is the latest research firm to slap the newspaper industry with a negative outlook over the next 12 to 18 months due to downturn in revenue and circulation as advertisers and readers turn to the Internet.

Its also threw down the possibility that industry fundamentals are weak enough that it will drag down even the best-positioned companies.

“Liquidity and covenant compliance could be a primary issue leading to negative rating pressure for almost all industry participants even if an issuer’s leverage is within the expected band for its rating,” wrote Moody’s vice president and senior analyst John Puchalla, VP, senior analyst John Page, and their team, in a report released this week.

The outlook report explains the newspaper industry is facing two challenges at once, a cyclical downturn and the migration of readers and advertisers to the Internet. What’s troubling is that even if an economic re-bound occurs, it will be much less “robust” compared to other corrections.

Moody’s cites Universal McCann data that shows that the newspaper industry’s share of U.S. advertising dropped to 15% from 22% over the past 10 years as a result of fractured media landscape and advances in technology that make news more immediate (and therefore print becomes less relevant).

Moody’s analysts anticipate that newspaper advertising revenue will decline in the range of 7% to 9% in 2008 and moderate to low single-digit declines in 2009 — if the economy recovers next year.

Puchalla and Page wrote the reasons behind the high level of newspaper downgrades are three-fold: the loss of newspaper advertising share in relation to total U.S. advertising, the willingness of newspaper publishers to operate at higher leverage levels, and liquidity.

In the past 10 years EBITDA as a percentage of revenue fell 19% from 28%, Moody’s reports. The erosion in margins means that publishers will have to aggressively manage fix-costs– a Catch-22 if ever there was one. Moody’s analysts acknowledge that, “editorial and sales are critical regardless of the business mode. It will prove challenging to continually reduce editorial costs without impairing the core news product or employee morale.”

The spending the industry has reduced — Moody’s estimates $980 million in 2007 — has not kept pace with revenue declines. The cuts only offset about 61% of the drop in revenue. “The result is a 10% decline in EBITDA” in 2007 “with performance weakening to a 12.7% drop in EBITDA for Q1 of 2008.”

Paper prices are expected to rise as producers cut capacity in efforts to stabilize newsprint prices, making the reductions even more difficult. “More aggressive non-newsprint cost actions might be necessary to mitigate the effects of revenue declines,” Puchalla and Page wrote.

But it’s not all darkness in the land of newspapers. Moody’s analysts think the medium has a number of distinct advantages including an “unmatched infrastructure at local, national, and international levels to provide news and information to a large audience.” Newspaper readers have enviable demographics highly desired by advertisers.

“We believe that newspaper companies, which have been slow to exploit the value of their content across the range of news and information channels, will use their strong branding not only to provide internally generated content but also become a trusted aggregator of user-generated content,” analysts wrote.

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