Goldman Concerned Over Slow Revenue Growth

By: Jennifer Saba Newspaper ad revenues are growing at a snail's pace in spite of a healthy economy, and this has Goldman Sachs concerned. ?What will the revenue picture look like in the next recession?? asks the research firm in a report released today. ?Investors must re-calibrate their revenue growth expectations for publishers in the context of an increasingly competitive local media environment.?

Q2 total revenues are expected to be up only 2.5% to 3% (advertising up 3% with circulation down 1%). For May, newspaper ad revenue grew 3%, about the same as in April. June is estimated to grow the same amount.

Goldman pegs the national category as the weakling, down 0.2% because of decreased spending in entertainment and telecommunications. It's suspected the movie studios are taking dollars elsewhere and that recent merger and acquisition activity in the telecom sector is affecting results. Of national revenues, telecom accounts for 20%, and entertainment makes up 14%.

The tone of the note suggests that trends are shifting and not in favor of the industry. ?There increasingly appears to be a disconnect between macro variables that historically have been well correlated with ad spending and actual trends in the newspaper ad market.? Bellwether Gannett, for instance, was recently downgraded from ?outperform? to ?in-line.?

Now only one company the firm covers stands with an ?outperform? stamp: E.W. Scripps. The favored company is well positioned, according to Goldman, because of its cable and Internet operations.

Here are Goldman's comments on other stocks in the sector:

Dow Jones: Great Franchise, expensive stock (underperform)

Journal Communications: Significant margin upside potential, but telecommunications business adds uncertainty (in-line).

Knight Ridder: Core business remains weak on anemic ad revenue trends (in-line).

McClatchy: Strong franchise (and management), fairly value stock (in-line).

New York Times: Love the franchise, don't love the stock (in-line).

Tribune: No near-term upside catalysts for either earnings or valuation (underperform).