J.P. Morgan Analysts: Beware of Newspaper Rallies, Ad Revenue Could Fall 25% in Q3

By: Jennnifer Saba TNS Media Intelligence said the pace of the decline in advertising spending, which fell 14.2 % in Q2 year-over-year, has leveled off compared to the previous quarter. This piece of news contributed to a surge in newspaper stocks, which have been enjoying a comeback since the summer.

Yet a new report from J.P. Morgan analysts Alexia Quadrani, Monica DiCenso and Townsend Buckles believe that while the ad market might be stabilizing, it's still a long way off from growth.

"With so many other advertisers still wary of a slow recovery and fewer advertisers around after so many small businesses have closed, we believe there is no quick fix in the local ad market and expect ongoing declines to persist at least through the rest of the year," the analysts wrote in a note released Wednesday.

J.P. Morgan forecasts that newspaper ad revenue will decline 25% in Q3 and in the "high-teens" in Q4. For 2010, newspaper ad revenue is expected to fall in the range of 7% to 10% on easing comparisons.

In Q2, many newspapers managed to surprise the market by posting growth due from steep cuts. That could be a bit more difficult in Q3. Quadrani and her team point out that rising paper prices could hamper cost cutting measures.

J.P. Morgan cautions those interested investing in newspaper stocks given the "top line challenge" of revenue and generally heavy debt loads.


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