One Wall Street Analyst Bullish on Online Growth

By: Jennifer Saba Could it be that the newspaper sector still has room for growth?! The industry has been on a dismal streak with declining circulation, plummeting stock prices, and angry shareholders baying for bust ups, yet one financial analyst thinks the ray of hope for the industry is newspaper Web sites.

Bear Stearns' Alexia S. Quadrani issued a report on Monday that concludes there's a possible break in the torrent of bad news: "The Internet is an area where newspapers can protect and gain market share over time, and this ultimately could help the newspaper stocks."

Online ad revenue accounts for only 3% to 5% but is growing like gangbusters at 30% to 60% annually. The report points out that many publishers are probably discounting online ads through bundles or packaged deals, so the increase could be even greater.

"We believe the potential of these assets to contribute to long-term growth at the newspaper companies is underappreciated," the report said about newspaper Web sites.

Additionally, the report speculates that despite the wild success of Yahoo and Google, newspapers are extremely well positioned in their respective local markets as "one of the dominant and most reliable media sources with extensive advertiser relationships."

Bear Stearns' favorites: E.W. Scripps, Knight Ridder, and The New York Times Co. "We believe three years from now these online businesses could represent over 10% of consolidated revenue (over 15% in the case of Scripps)."

Scripps acquisition of Shopzilla should positively impact the company. Knight Ridder has an "especially focused strategy" and the New York Times Co. has done well with its purchase of About.com (not to mention, the New York Times' Web site is ranked No. 10 nationally).

Granted, it will take some time, possibly three years, for online properties to affect advertising, readership, margins, and earnings growth, said the report. For example, Scripps says it gains an extra 20% readership from its Internet sites though online advertising accounts for only 3% -- a sizable gap.

And Bear Stearns is in no hurry to change its opinion on the newspaper sector; it maintains its "market weight" rating.