Goldman Sachs Issues Negative Note on State of Industry

By: Jennifer Saba Goldman Sachs analyst Peter Appert sharply reduced the growth forecast for the newspaper sector in a comprehensive, negative note issued this morning.

Given that publishers indicated there is no relief in the foreseeable future for anemic advertising growth based on presentations made during Mid-Year Media Review, Appert and his team came to the following conclusion: "The magnitude of the recent declines is extraordinary for a non-recession period and provides concrete evidence, in our view, that the share shift from print to online in the publishing industry is accelerating."

Some companies are more at risk than others. Goldman cut its rating on McClatchy from "neutral" to "sell" and reinstated a rating on The New York Times Co. to "sell." The two companies were singled out due to their make-up as pure play newspapers businesses.

The research firm based the note on several factors, including that newspapers clearly no longer dominate classifieds, that margins are under pressure, and that the transition period from print to online will be "painful" and "extended."

Analysts estimate that transition will take as long as five years for online revenues to offset deteriorating print revenue. However, they are bullish on the future once that transition is made: "Ultimately, we believe newspaper publishers will re-emerge as very healthy and dominant players in the local media marketplace."

Journal Communications was upgraded from "sell" to "neutral" based on the company's diversified portfolio.

Goldman lowered its ad forecast for the sector for 2008 and 2009 to -2.1% and -1.3% respectively from an increase of 1%.

"The recent downturn is alarming," Appert wrote about ad revenue declines that have been occurring since the end of 2004, "in that it has occurred in a relatively healthy economy."

Appert pointed to May, where ad growth plummeted 9.1% -- a drop that was "extraordinary in terms of the scale of the decline and the scope of the challenges it represents," he wrote.

In 2007, it is anticipated that ad revenue will tumble 4.4% despite big gains in online revenue.

By category, Goldman forecasts that national ad revenue will fall 5% on an annual basis. Retail is expected to drop 2.5% eventually flattening out beyond 2008. Classified is forecasted to plunge 10.8% this year with drops of 6% to 7% through 2011.

The note addresses the past acquisitions starting from the Knight Ridder auction and ending with News Corp.'s bid for Dow Jones & Co. With the exception of the rich offer for Dow Jones, Goldman believes the transactions have not been that valuable for shareholders.

"Our view continues to be that on a long-term basis operating fundamentals will always trump takeover/restructuring speculation," analysts wrote.


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