Report: 2005 One of the Worst Years for Newspaper Stocks in a Decade

By: Jennifer Saba

Last year is shaping up to be a stinker for the newspaper industry. The sector turned in one of its worst performances in a decade, with newspaper index stocks down 21% during 2005 — underperforming the S&P500 by about 24%, according to a report released today by Goldman Sachs.

“It was a clean sweep, with all nine of the newspaper publishers in our coverage universe posted negative stock price performance for the year,” said the report. “It’s enough to make a newspaper analyst cry.”

The upside in 2006? Not much. The revenue environment is going to be challenging, cost issues continue to put pressure on margins, and earnings estimates are still too high. “Otherwise, things look great!” the report said sarcastically.

Newspaper stocks will probably lag again in 2006 unless the possible purchase of Knight Ridder comes through above expectations.

Goldman thinks there’s a possibility that a financial player will be willing to be aggressive and pay a higher price for Knight Ridder (above $70 a share). “We note, however, that offers from strategic or financial bidders that fall close to or below the current share price of Knight Ridder would be a disappointment,” the note said.

If a Knight Ridder deal doesn’t fan the flames, then investors will look to industry fundamentals to guide their strategies. In that case, the research firm forecasts 3.6% ad revenue growth for 2006, the low end of the industry’s 3% to 5% range.

Analysts believe that the sector needs to “retreat” another 11% on average before it can be considered a value.

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