Prudential Report: Outlook 2006

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By: Jennifer Saba

Prudential Equity Research analyst Steven Barlow weighs in on the prospects for the newspaper sector in 2006. Given last year’s poor performance — Prudential’s newspaper index was down 20% compared with a 3% gain in the S&P500 — it’s unlikely investors will rally in Q1.

“We don’t see much cause for excitement in the first quarter,” said the report, which was first released on Monday. Of course, the sale of Knight Ridder could always spark interest. But the cards are stacked against the industry: lackluster Q4 results, Internet competition including Google Base, circulation losses, and higher newsprint costs.

“We think investors will revisit the group in March and April based on a combination of valuation and an early read on advertising revenue in January and February,” the report said.

Prudential isn’t totally down on the industry. The research firm points out that though the business model is in trouble, there’s much to be salvaged. “In most communities, the newspapers have the best brand names in local news, and with that the companies can build out better print and online products,” the report said.

While Prudential does not think that newspaper companies are being too “complacent” about the Internet, the firm says they need to get more aggressive. “Products such as Shoplocal are clear winners, in our view, and are able to compete with Google and others, as the newspapers have salespeople on the street to capture local revenue,” the report said.

On the advertising front, retail is expected to rise at least in the second half of the year when the impact of the Federated/May merger will have taken effect. Telecommunications advertising will grow as well as SBC/AT&T launched a massive re-branding campaign. In the classified category, Prudential is not concerned about real estate and help wanted. As for auto, it “can’t get much worse.”

The research firm also predicts that the Audit Bureau of Circulations’ March report could deliver good news (or, put it another way, not as bleak as the previous two reporting periods).

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