Mixed Reaction From Analysts on FAS-FAX Report

By: Jennifer Saba Research analysts have mixed reactions to the latest spring circulation data released from the Audit Bureau of Circulations on Monday. Overall circ took another nosedive, with daily down 2.5% and Sunday down 3.1% -- one of the period's biggest drops, according to the Newspaper Association of America.

And yet, there was hope the spring would bring improvements especially compared to the March 2005 report, the first full FAS-FAX to come out in light of several circulation misstatements.

"We had optimistically thought trends would improve slightly in this March audit," wrote Merrill Lynch analyst Lauren Rich Fine in a report released this morning. "We believe companies are continuing to manage down third-party circulation volume in favor of focusing on individually paid circulation, which is weighing down overall averages."

Fine also thinks there is some residual impact from the Do Not Call registry, in-acted in October 2003.

Prudential Equity Research's Steven Barlow wrote in a note released on Monday, "This FAS-FAX report is not encouraging. We had hoped with all the manpower that has gone into improving circulation in the industry would produce better results. We are not looking for a positive average but only seven newspapers reported increased circulation daily and Sunday out of the top 50."

Alexis Quadrani, an analyst with Bear Stearns, was more sanguine (comparatively) about the spring numbers. "Overall we believe these results are in line with expectations and therefore do not expect a material impact [on] the publishing stocks."

Indeed the Philadelphia Inquirer reported that the newspaper sector rallied on Monday despite the weak circulation numbers.

An analysis of newspapers in Merrill Lynch's coverage universe shows that mid-sized market papers fared the worst of the lot. Newspapers with a circulation above 500,000 reported declines of 1.3% daily and 1.6% on Sunday. Smaller papers with circulations between 40,000 and 100,000 had decreases "roughly in line" with the overall average with daily down 2.4% and Sunday down 2.6%. Still, Merrill Lynch points out "this is somewhat surprising given that smaller markets have been holding up better than average from an ad revenue perspective."

It's the metros with circulations between 100,000 and 500,000 that took the biggest hit. Daily circulation slipped 3.3% and Sunday dropped 4%. "These papers feel most at risk to us as they likely suffer from more intense competition, both from traditional media outlets in their markets and from online, and their niche is harder to define," said Merrill Lynch.

Many publishers continue to pin declines on the weeding out of other paid circulation. Prudential focused on the top 50 newspapers that it usually does in its circulation reports and found that other paid circulation dropped 2.1%. It decreased 2.8% in the six-month period ending September 2005. "The continued decline in this category suggests newspaper companies are becoming less dependent on other paid circulation to boost their overall numbers," according to Prudential.

Prudential and Merrill Lynch took a closer look at circulation by the companies they cover. Not surprisingly, the Tribune Co. saw some of the steepest declines -- Merrill Lynch said the company declined 3.3% daily and 2.6% on Sunday -- as it is under the most scrutiny because of the past Newsday scandal. The company has also led the way in aggressively cutting its other paid circulation.

There was some mixed reaction to Gannett's results especially since the company's newspapers showed a lot of variance. Most surprising, according to Prudential, was the decline in daily and Sunday circ at The Arizona Republic, down 2.1% and 3.1% respectively. "We find the circulation fall-off somewhat surprising, given the fact that the population in Arizona has increased 15.8% since 2000 according to the U.S. Census Bureau," said Prudential.

At Knight Ridder, which also reported some of the biggest declines, Merrill Lynch looked at the 12 papers that McClatchy is planning to divest (McClatchy announced it will acquire Knight Ridder and sell 12 of its papers) and found that daily circ dipped 4.7% and Sunday dropped 4.1% (excluding St. Paul, which gained, daily declined 6% and Sunday declined 5.2%). For the papers that McClatchy is keeping daily circ decreased 4.1% and Sunday dropped 4.7%.

As for McClatchy it "uncharacteristically" was down for the second FAS-FAX in a row, said Merrill Lynch. Daily was down 2.8% and Sunday was down 4.4%. "This isn't a huge surprise as we have seen the declines reported with monthly ad revenues," said Merrill Lynch. "However, it is interesting to note the seemingly rapid deterioration in McClatchy's circulation volumes post the industry circulation misstatements in mid 2004, which resulted in increased scrutiny across the industry. We are also a bit surprised by the declines in California."

At The New York Times Co., Prudential notes that the Boston papers are weighing down the company's overall circ results -- the Globe was down 8.5% while the New York Times posted an increase of 0.5%. Prudential applauds the Times growth but points to the fact the paper's other paid circulation grew 12%.