Will Rising Interest Rates Impact Newspapers?

By: E&P Staff Over the past three years, the newspaper industry has benefited greatly from low interest rates, which have dropped significantly -- from 6% in 2000 to 1% by mid-2003.

The historically low rates have softened the blow on advertising, which essentially fell off a cliff. Gannett Co. Inc., Knight Ridder and The New York Times Co. reaped the most from this, according to a new report issued by Goldman Sachs. Because of rock-bottom interest rates, both Gannett and Knight Ridder experienced about a 40% drop in interest expense from 2000 to 2003, even though they had average debt balances that remained unchanged. The New York Times Co. had a 30% drop in interest expense.

But there's a consensus building among the investment community that within the next six to 12 months, the Fed will implement a hike.

By how much remains to be seen. Some say 50 basis points while others pin an increase on 100 basis points. Either way, it will probably happen and it will have a modest effect on the industry's earnings per share (EPS), according to the investment firm. The companies that will feel it the most (based on each 50 point basis increase) are Knight Ridder (by 1%), McClatchy (by 8%) and Dow Jones (by 0.6%), according to Goldman Sach's predictions.

While Goldman Sachs notes that the impact of a hike will be somewhat mild in regards to earnings, the "indirect impact may be much greater." Higher rates will bring higher consumer borrowing costs, which might cause a slowdown in consumer spending. As consumers spend less, advertisers tend to pull back. It's Goldman Sachs' view that "stock valuations are negatively correlated with interest rates and rising rates can be particularly negative for consumer oriented companies."