The Day After: Analysts Not Spooked by Circ Shortfalls

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By: Jennifer Saba

Scary things tend to be less and less worrisome when they pop up all the time. Case in point: when faced with yesterday’s delivery of bloodcurdling circulation drops at newspapers across the country, analysts reacted with a shrug.

“Circulation declined as expected,” wrote John Janedis, senior analyst with Wachovia Equity Research, in a note. He, like others, points to the effects of the Internet that is giving print circulation a whipping.

“We expect the companies in our coverage universe to continue to improve their online presence, using both their own Web sites, as well as to purchase other online assets, to help combat the continued decline in circ trends,” Janedis wrote.

Bear Stearns analyst Alexia Quadrani doesn’t even think yesterday’s bad news — daily circulation plunged 2.8% and Sunday fell 3.4%, one of, if not the worst drop in recent years — will do much to shake The Street’s confidence. Or lack thereof.

“Overall we believe these results are in line with expectations of low to mid single-digit average declines and therefore do not expect a material impact [on] the publishing stocks,” Quadrani wrote in a note. For that, she’s waiting for October advertising results.

Both Merrill Lynch and Prudential Equity Research grouped circulation by companies in their coverage universe.

Steven Barlow at Prudential wrote in a note that The New York Times Co. and McClatchy showed the worst declines in circulation, with daily down 5.1% and 4.4% respectively, when looking at the top 50 papers. Lee was the best performing company.

Merrill Lynch’s Lauren Rich Fine broke out McClatchy before and after the Knight Ridder acquisition and found that circulation for both companies were similar. “Interestingly,” she wrote in a report, “the newly acquired Knight Ridder properties only performed slightly worse than McClatchy’s original newspapers (down 4.2% versus 3.8% daily).”

Fine also noted that Lee topped the newspaper companies in her coverage universe as well by posting the smallest decrease in daily circulation, down 0.4%. Journal Communications wins for Sunday, down 0.9%. She notes that both were “aided somewhat by gains in other-paid circulation.”

At the Tribune Co., Prudential and Merrill Lynch both mention how the company is one of the most aggressive in cutting other-paid circulation. Merrill Lynch said the category plunged 45% daily and 52% Sunday. Barlow found Tribune’s results “encouraging.”

Overall, Fine runs the numbers and found that the industry’s focus on trimming other-paid circulation is paying off. For the companies she tracks, the category fell 10% daily and 17% on Sunday.

Edward Atorino at Benchmark Equity Research ends on a somewhat upbeat note in his assessment: “We think circulation could show smaller declines or possibly stabilize in 2007 as newspapers cycle through the declines seen this year and the effects of third party circulation reductions start to wane.”

Shares of Tribune, McClatchy, Lee, the News York Times Co., and Journal Commuications are trading down.

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