Analysts: Q3 Results Will Be Soft

By: Jennifer Saba Wachovia Equity Research lowered its Q3 newspaper ad growth estimates for "every company under coverage," said a note released today. "Overall, we remain cautious on the group, with [Dow Jones] and [McClatchy] as our only outperform rated stocks."

Wachovia predicts that ad growth for the quarter will decline by 1.1% for its coverage universe given that August is looking soft. The note points out that there are early indications that September could be strong. Though if the forecast proves otherwise, it only ads more risk to the sector.

Wachovia thinks that there will be an 11% decrease in earnings per share for the group in Q3.

Top concerns for Wachovia analysts: Real estate and employment ad growth. Both categories, which have been holding up total ad revenue, are starting to show strains. Wachovia doesn't believe there will be much pick-up with the movie, auto, and department store categories to offset any weakness to come.

The New York Times Co. and Journal Register are the most vulnerable, according to the report. Boston continues to drag down the Times and there are signs that the New York Times' ad growth is going soft. For Journal Register, its Michigan properties continue to remain problematic.

Also disconcerting for those working in the industry, Wachovia believes that while publishers have done a good job containing costs, "we don't think the industry has been able to cut quickly enough to post margin expansion."

Meanwhile over at Goldman Sachs, analysts are just as cautious waving off some investors that have suddenly become interested in the sector.

"Some investors have taken note of the sharp underperformance of the newspaper stocks in the context of still reasonably healthy cash flows and the possibility of further industry restructuring," analysts wrote. "Our message to investors is unchanged: newspaper stocks are 'value traps,' not value stories, and we would stay on the sidelines."

Goldman Sachs raised some of the same concerns that Wachovia has, mainly a drop-off in help-wanted and real estate advertising. However, Goldman Sachs has not yet revised its Q3 estimates.

Bear Stearns focuses on the sector stock rally publishers have been enjoying since the beginning of August. The group is up 1.5% while Bear Stearns' universe is up 2%.

Yet, analysts there are not convinced the party will last. "We believe the fundamental outlook for the group remains challenging," according to a note. And not surprising, two advertising categories pop up again as culprits -- help wanted and real estate.