By: Jennifer Saba In a new report, Bear Stearns suggests that newspaper companies with holdings in Florida and California will likely see results weaken as the real estate downturn impacts other advertising categories.
"Already struggling with the secular challenges of declining circulation and shifts in ad spending away from print, the cyclical hit of the weak housing market and the ripple effect we believe will occur into retail should continue to weigh on earnings into first half of 2008," Bear Stearns analyst Alexia Quadrani wrote.
She notes that year-to-date through August, newspaper ad revenue is down 7%. Third quarter to date, ad revenue declined 7.8%. Classified advertising fell 14.8% in the first half of 2007.
Retail is going to be the most vulnerable category, since consumers will probably spend less. Florida, predicts Bear Stearns, will feel these affects more acutely. It's expected that retail sales will drop in Q3 and as a result retailers will cut back dramatically on advertising.
In Bear Stearns coverage universe, Tribune and E.W. Scripps have the most exposure to Florida and California in terms of revenue at 37% and 14%, respectively.
Quadrani is less concerned about Scripps since most of the company's revenue (57%) and profit (70%) comes from its other holdings, which can more than offset the decline of newspaper ad revenue.
Gannett and The New York Times Co. also have exposure in those markets, at an estimated 7% and 9% respectively. The New York Times, in Bear Stearns view, does not have the TV stations that Gannett does to offset any revenue losses. In addition, the New York Times does not have as much room to work with its margin as does Gannett.
Bear Stearns maintains its "underweight" rating on the sector, while Scripps and Gannett are still rated "outperform."
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