None of The Talk About A Possible US Recession Is Helping Newspaper Companies As Ratings Firms And Financial Analysts Continue To Cast Two Thumbs Down And The New York Times Results Didn’t Do Anything To Help

Philip Stone September 14, 2007

The one thing that the financial ratings agencies and financial analysts seem to have in common these days is that none of them have anything nice to say about the US newspaper industry. Debt continues to be downgraded and the analysts claim the worst is not over, one even saying he believes there will be another 20% slide in newspaper share prices within the next 18 months.

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And the August results for the New York Times Company will do nothing to reverse that sentiment. Advertising revenues for its News Media Group dropped 4.6% from a year ago (and remember a year ago the drop was severe from the year before and that was a sharp drop from the year before that …). Advertising revenue from its New England Group were down 9% (the Boston Globe remains a disaster), and at its Regional Media Group advertising revenue was down 11.9%.  And all of that was on top of an overall 3.5% advertising drop in July, so the numbers are continuing in the wrong direction. What saved the day in August was that its Internet ad revenue increased 28.2% and a newsstand increase for the New York Times saw circulation revenue increase overall by 3.6%.

As if foreseeing those results, Moodys in late August lowered its ratings outlook for the company, blaming pressures on retail and classified advertising income and a downturn in the housing industry. “These pressures along with a 31% increase in the company’s quarterly dividend in March, 2007 (done to increase shareholder value), tax payments on recent asset sales (it dumped its broadcast holdings) and continued heavy capital spending through early 2008 will challenge the company’s ability to generate sufficient free cash flow” that is necessary to get 2008 debt-to earnings ratio where it should be, Moodys said.

But even though Moodys left NYT’s senior unsecured debt ratings at investment-grade, other financial analysts have not been kind to the company – Banc of America Securities started coverage this week with a “neutral” rating which really seemed to spook the market and NYT shares this week have now hit lows not seen for the past 10 years, with the shares actually falling below $20 for a while Wednesday. (Makes you wonder what  Morgan Stanley Investment Fund Manager Hassan Elmasry sitting in London with 7% of the company must be thinking about  all of that and his as-yet unsuccessful attempt to change the company’s share structure so the Sulzbergers don’t have the complete control they now have under  the dual share system).

Joe Arns, the Banc of America analyst, painted this overall gloomy industry outlook, “We predict the industry ad revenue decline to continue through 2008 given the slump in real estate and fallout in broader economic activity.” And as for the New York Times Company specifically, he added, “Reliance on the New York and Boston metros for half the company’s revenue could be a drag in 2008.”

Moodys has issued a report saying media companies will be particularly vulnerable to a US recession and it names the New York Times Company as a particular worry. The Times has a heavy debt load and having dumped its broadcast business it is now very much a newspaper business – whatever form that takes including the Internet.

Analyst Neil Begley says newspapers are particularly vulnerable to a recession because newspapers have the highest advertising rates. Given that, advertisers could well look for a lower-cost spend.

And then there was the week’s report from Lehman Brothers that basically said, “If you think it is bad now wait another 18 months”.  Analyst Craig Huber forecast newspaper company shares could fall another 20% within the next 18 months. The problem, he said, is that not as many people as before are reading newspapers, and not so much advertising money is finding its way to newspapers as it had before. (A TNS Media Intelligence report this week said US newspaper advertising revenue was down 5.8% for the first half of this year).

Fitch Ratings in its half-yearly outlook zeroed in on how badly newspapers are doing with their classified advertising – responsible for about 30% if not more of their total revenues. It noted that two of the most prolific classified categories – real estate and automotive – are taking a bloodbath.

As examples Fitch listed these results through July:

  -- Gannett Co, Inc. (Not Rated): Ad pages down 17% at USA Today and pro forma real estate classifieds at community newspapers down 20%.

-- Tribune Company (rated 'B+', Rating Watch Negative by Fitch): Classifieds down 18% driven by real estate down 24% and employment classifieds down 19%.

-- The McClatchy Company ('BB+', Stable Outlook): Real estate down 26%, Automotive down 20% and National down 19%.

-- Dow Jones ('BBB+', Rating Watch Negative): Ad volume down 20% driven by a 75% decline in technology related ads. Classifieds down 14%.

And Fitch does not buy into the cyclical argument, saying it believes that around 50% of the advertisement declines are permanent. It did note, however, that volume percentage declines are more than revenue percentage declines indicating that newspapers have been able to increase some rates.

On the positive side Fitch noted, “Newspaper operators have received relief on newsprint costs, have scaled back delivery boundaries to reduce transportation costs and have been very tight on labor-related costs. This focus on costs is viewed as positive for the industry, but Fitch remains cautious that labor costs could be much more difficult to reduce going forward as change-adverse cultures and union affiliations could obstruct meaningful additional labor-related cost-cutting.”

Just take a look at the labor negotiations now ongoing at Dow Jones as a primary example of the labor unrest that may be ahead. And talking of Dow Jones, its investors, particularly those employees who held so many shares and options should probably be kissing Rupert Murdoch’s feet for the 65% premium they are getting, rather than putting up signs in the newsroom with Murdoch’s picture asking, “Where’s the Money?”

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On September 14, 2007 Larry Grimes President W.B. Grimes & Company Gaithersburg, MD USA wrote:

I can't help but to wonder, why the newspaper industry, yourself included, is so intent on bashing the industry you supposedly hold so near. 

Some of the ills the industry has certainly brought on itself.  But many issues have been beyond their control and continue that way today….including the development of advertising platforms that capture the ad dollars and have the same effect as those ads that previously ran in the printing publications.  Those platforms don’t exist. In fact, we may only be one shopping season away from retailers re-thinking once again their on-line marketing strategies and recognizing the value of their print components.   

It may be a large percentage of newspaper editors just have a negative outlook on life and take some sort of pleasure or feel a “social calling” to continually try to point out what’s wrong (and, of course, without answers or solutions to these problems).   Have you witnessed the newspaper industry fighting back at all?  Perhaps an occasional weak lob from one of the associations—but nothing on the hometown paper front.    The papers seem more intent on focusing on potential loss of newsroom jobs, and advertising supposedly drifting to the Internet than talking about the un-paralleled news coverage they are providing in their markets or the dynamic web presence they have created.    Or why their medium remains the dominant medium their market.  

I’m starting to see some negative reporting now related to the performance of weekly newspapers. ..even though any revenue short-falls appear clearly linked to the state of the U.S. retail economy.  It will be interesting to see if the media starts pounding on this to the point where they drive M&A multiples down like they did for the daily newspapers.   Case in point,  you don’t see this bashing in radio.  They’ve done a wonderful job propping up their medium while getting away with producing much inferior programming, lessening market share, etc. over the past five years.