By: Jennifer Saba
Goldman Sachs analyst Peter Appert believes newsprint prices will ease in 2007 a ?rare bit of good news for an industry? that hasn?t seen much in the way of positive forecasts.
The underlying reasons behind the estimated price declines aren?t so pretty though. Consumption has declined due to falling circulation and newspaper publishers have been making efforts to trim the paper by reducing web-widths and cutting back on certain agate like stock listings.
A risk to the estimate, wrote Appert in a note released today, includes the mega-merger of Bowater and Abitibi, North America?s two largest newsprint producers, which combined would control half of the industry?s newsprint supply. However, China has joined the game and those producers could help hold back potential price increases.
Appert notes that while the cost per ton of newsprint has grown at a compound annual growth rate of 1.8% since 1980 — below the rate of inflation — producers responded by cutting capacity giving them more control over pricing.
?Our sense,? Appert wrote, ?is that both publishers and newsprint producers would like to see greater stability in newsprint prices, but neither side knows how to achieve this goal. For publishers, the tug-of-war between greater long-term cost visibility through more stable prices versus the short-term earnings benefit of cyclically depressed paper prices always seems to favor short-term earnings.?
Goldman Sachs estimates that some companies will benefit more from price cuts than others boosting their earnings per share: The New York Times Co., Dow Jones & Co., Belo, Tribune, and Gannett (in that order).
But analysts are still bearish on newspaper stocks despite the potential benefit: ?While stabilization in newsprint prices is clearly a positive, in the absence of an uptick in revenue trends, we?d continue to avoid newspaper stocks.?