Goldman: Newspaper Industry Performance Likely to Stay 'Anemic' In '08

By: Mark Fitzgerald In its monthly review of newspaper industry trends released Tuesday, Goldman Sachs concludes that ad revenue will remain "anemic" for the rest of 2008 -- even as easier comparables with last year show improving numbers.

"Having spent time with management from Gannett, New York Times and Scripps over the past week, our sense is that investors should not expect a change in ad revenue trends into May," the firm said.

"We note that year-over-year comparisons will ease over the balance of 2008, which will likely translate into modest improvement in reported numbers. However, investors should not be lulled into believing that this implies improving business trends, as we expect the underlying tone of ad demand to remain exceptionally soft in the context of a challenging macro backdrop and continued loss of market share in the classified category."

April ad revenue: The publicly traded newspaper companies tracked by Goldman Sachs dropped 10.7% from the year before, even with the benefit of an early Easter. Classified ad revenue fell 20% for the group.

Goldman Sachs said it remains bearish on the newspaper sector, as it has been for some time. "While revenue comparisons ease somewhat in the second half, cost comparisons will become more difficult as recent newsprint price increases begin to impact operating results," it said.

The investment firm said its Forest Products research team is forecasting a 20% year-over-year increase in the cost per ton of newsprint in the second half of 2008.

Goldman Sachs made these observations about specific companies in its report:

McClatchy, which it recommends as a "sell" stock, "is particularly vulnerable to the current industry malaise" as a newspaper pure-play company.

"While we have high confidence in management's execution capabilities, high debt levels and significant exposure to a weak newspaper advertising revenue environment, particularly in the classified categories, places McClatchy in a very difficult positions in the context of the challenging newspaper industry backdrop."

Scripps, on which Goldman Sachs has a "Neutral" recommendation, is a "study in contrasts" with struggling newspaper and television businesses, and "impressive gains" in its cable and online businesses. Goldman Sachs said it likes the upcoming split-off of cable and Web from newspapers and local businesses, but believes the market has already priced in the value of the split.

The New York Times Co. "has one of the strongest franchises in the industry and some of the most interesting digital assets," but an anemic financial performance, Goldman Sachs said.

"We think the recent rally in New York Times shares triggered by the accumulation of shares by two shareholder activist is unwarranted," it said, adding, "we'd be sellers into the strength.

Goldman Sachs said the New York Time's near-term stock price might approach $16 a share "under a scenario in which all assets except the New York Times is sold with proceeds reinvested in Internet businesses," which is the strategy proposed by the Harbinger Capital Partners/Firebrand activist shareholders.

Times shares (NYSE: NYT) mid-morning Tuesday were trading up 14 cents, or 0.8%, at $17.59.

Journal Communications, with a "Neutral" Goldman Sachs rating, has sold off slower-growth businesses, but the firm said it sees "no near-term catalyst for the shares in context of the challenging industry and macro environment."

GateHouse Media Inc. share price has been depressed by industry trends and concern about its debt load. "Our thesis that a focus on smaller, 'hyper-local' markets would serve as a counter weight to the cyclical and secular pressures negatively impacting newspaper industry revenue performance has proven only partially correct, as evidenced by the declining trend in same-story revenues over the last several quarters," Goldman Sachs said. The firm has a "Neutral" rating on GateHouse.

Gannett Co. Inc. is "an exceptionally well run company in an exceptionally challenging industry," but it sees nothing in the near-term likely to boost its stock.

"While Gannett enjoys a well-deserved reputation for tight cost controls, the head-wind created by mid-to-high single digit pro forma revenue declines means that even the best managed company will have a difficult time posting positive earnings comparisons on a near-term basis," it said.