By: Jennifer Saba Bear Stearns analyst Alexia Quadrani knocked the newspaper sector down a peg by lowering the group rating to ?underweight? from ?market weight.?
The reason for the change: Q1 performance fell below expectations, the future for rising ad revenue looks ?lackluster,? and the sector?s stock will probably sink another 10% before it sees bottom.
The research firm revised down its 2006 ad revenue forecast. In February, Bear Stearns estimated the industry would grow 2% to 3%. Based on comments from executives representing three newspaper companies and weak Q1 results, Bear Stearns is now predicting ad revenue will come in flat or increase slightly 1%, according to a note released today.
The revision takes into account a ?robust? 25% to 30% of online revenue growth that represents 7% of total annual revenue -- implying ?significant weakness in the print product.?
Last week, analysts met with executives from Gannett, E.W. Scripps, and Tribune and found little evidence to suggest an upturn in ad revenue. ?Although we concur with industry executives that newspapers remain a viable, and important medium in the ever-fragmenting media landscape, we do believe that the print product, which still drives over 90% of advertising revenue, will continue to suffer from a secular shift in advertising dollars to other media,? wrote Quadrani.
Despite an average 19% drop in stock prices in 2005 for Bear Stearns? coverage universe in 2005 and an 11% decline year-to-date, the group is still trading high (8.4 times 2007 EBITDA), according to the report.
?We believe based on the tough ad and circulation revenue environment, continued margin pressure and lackluster earnings growth forecast, industry valuations may decline to the lower end of their historical trading range (7 or 8 times 2007 EBITDA) where the stocks traded in the mid-to-late 1990s.?
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