By: Jennifer Saba Merrill Lynch released its Annual Newspaper Primer today, revising its 2004 ad forecast down to 5% from 5.5% growth, which still "might be a hair too high." Newspapers are underperforming since overall U.S. ad expenditures are estimated to increase 6.3%.
The reason for the cut is concern over fourth quarter numbers, especially in the classified and national ad categories. Classified revenue accounts for roughly 35% of total ad revenues and while the help wanted category (about 27% of overall classified revenue) has been a strong performer, it's not enough to lift the entire segment. "There remains palpable concerns regarding the secular threat of Internet recruitment ads both as it relates to market share and pricing in print," the report said.
After coming off a stellar year in 2003, the national ad category has been knocked down a few pegs as 2004 has swung wildly. The report notes that national has always been a difficult category to predict. Over the long term, the industry's investment in new color will most likely boost the category.
Merrill Lynch praises the industry in its ability to adapt to the Internet. "Newspapers are doing well online showing tremendous top line gains and in most cases, leaps in profitability," the report said. "We think this is an area where newspaper management teams should be congratulated."
Despite the chip in the growth forecast, newspapers still remain a good investment for those attracted to free cash flow especially during "an uncertain environment." One investor told Merrill Lynch that "he needed a boring place to hide." However, the report stressed that "we cannot make any argument whatsoever for multiple expansion and have some concerns about margin compression."
Overall the investment firm expects steady earnings per share growth in the next year and notes "no cliffs on the horizon."
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