Goldman Sachs Thinks More Job Cuts on the Way

By: Jennifer Saba Last week's dueling media conferences in New York did not affirm that things would pick up in 2006. If anything, publishers only reinforced the cautious stance that many financial analysts have taken on the sector in the last year.

Goldman Sachs analyst Peter Appert's report recapping the confabs stated that revenue trends will remain challenging and earning estimates continue to move lower in the next year -- which means more staff cuts are likely on the way in 2006.

Like Merrill Lynch, Goldman Sachs thinks that publishers were too confident with their forecasts for ad growth. Most companies estimated an increase between 3% and 5%, versus approximately 3.3% growth in 2005. "An expectation that we think is probably on the optimistic side," the report said.

Since ad revenue is expected to be soft, publishers will probably rely on cost cutting to control margins. The research firm anticipates "continued attrition and the full year impact of 2005 staff cuts will likely translate into a 2% reduction in industry employment in 2006."

Almost all companies played up share buyback programs and dividend increases, though Goldman expressed that publishers were too tepid with the payback: "We did not get the sense that any of the presenters planned to meaningfully increase their payout ratio, instead preferring to retain the flexibility of allocating free cash flow on a more ad-hoc basis."

Here are the highlights by newspaper companies:

Belo: The research firm likes Belo's collection of media assets in above average growth markets, but feels that overall environment for all newspaper companies remains challenging.

Dow Jones: Goldman feels a bit better that lineage at The Wall Street Journal is tracking with Q4 guidance and losses at the Weekend Journal appear to be slightly below initial expectations. Still, Dow Jones is behind the sector. Goldman is advising investors to "remain on the sidelines" until there's evidence of an overall ad recovery.

Gannett: The bellwether company is starting to show some cracks. "While Gannett enjoys a well-deserved reputation for tight cost controls, the head-wind created by low-to-mid single digit proforma revenue growth means that even the best managed company will have a difficult time maintaining margins in the context of higher paper and benefit costs."

Journal Communications: Goldman is cautious on this company because of its lagging telecoms segment, below industry operating margins for the publishing segment, and limited growth potential in its "mature printing business."

New York Times Co.: "Still love the franchise, need to see sustained improvement in national ad revenues before we get more positive on the stock."

E.W. Scripps: The weak performance at the Shop At Home cable network is weighing down results. Still, the company remains one of the few bright spots in the sector, but the "stock will likely be in the 'penalty box' until company is able to provide evidence that Shop At Home will not be a continuing drag."

Tribune: The research firm came away impressed with the company's aggressive cost control but is still "concerned about the negative trend in revenues." The upside is probably limited given the unclear revenue environment, soft performance at the company's WB TV stations, and earnings growth that is cost cutting rather than revenue growth driven.