Fitch Sees Downbeat '06 For Newspaper Industry

By: Mark Fitzgerald In a downbeat assessment of U.S. newspapers, Fitch Ratings assigns an "outlook negative" to the overall industry in its latest report.

After reviewing 2005's litany of woes ranging from swooning circulation and depressed stock valuations to a tepid advertising environment and negative debt ratings from services like its own, New York City-based Fitch said it expected the current "trajectory of operating performance and ratings to generally continue in 2006."

Newspapers, the firm says, will face not only the problems "common among slow-growth companies in mature industries," but a swarm of other fundamental shifts such as the continued migration of news consumers to the Web, hastened by the spread of broadband -- which Fitch says could begin to impact even small-city and rural publishers in 2006.

Newspapers' best retail advertising customers are consolidating, and advertisers will begin to balk at the relatively high CPM (cost per thousand) of the medium.

And newspapers shouldn't think they can cure that problem by concentrating on readership -- i.e., audience -- over circulation, i.e. copy sales, Fitch warns.

"In Fitch's view, the newspaper industry's efforts at promoting adoption of a 'readership' metric in lieu of circulation could prove difficult as the trends in readership (excluding online) have likely tracked the negative trends in circulation, and Fitch believes the trends, rather than the absolute levels, are weighing more heavily in advertiser considerations," the ratings firm says.

And Fitch says 2006 could be the year when newsprint increases, which newspapers have successfully absorbed so far by reducing other costs, could finally begin to really pinch. "As cost reduction offset opportunities diminish, margins could come under increasing pressure," the report says.

The upshot of all this will be that newspaper companies are unlikely to enjoy in '06 the investment-grade ratings they earned historically because of their margins in excess of 20%, their stable revenue sources and costs, and their resilience through economic downturns, Fitch says.

"With newspaper stocks generally lagging the stock market indexes going into 2006 and with no meaningful catalyst for reversing the negative operational trends, Fitch expects that shareholders will continue to place pressures on these companies, forcing management teams to further re-evaluate capital structure strategies," the report warns.