With Gannett’s Capitalization Dropping $1 Billion In Four Weeks, With McClatchy’s Shares So Low There Is Talk Of The Family Taking It Private, Is There Anyone Out There Who Still Thinks This Is All Cyclical?

Who would have ever believed that Gannett, the largest US newspaper company, would see its market capitalization drop by $1 billion in just four weeks, at one point even falling below $8 billion? Who would have ever believed that McClatchy’s shares would sink to the mid $12s and the only reason they got a bit of a boost last week – up 7.3% on one day only to fall back again -- is because of talk the family may opt to take the company private.

How big is McClatchy’s fall from grace? Remember it paid last year some $6 billion for the Knight-Ridder newspapers and by the time it had rid itself of those newspapers it didn’t want the deal cost about $4 billion. Yet today McClatchy’s market capitalization is barely above $1 billion – at $1.05 billion.

There is now public talk that chairman and ceo Gary Pruitt should fall on his sword, perhaps taking up the role of non-executive chairman and the company should promote someone like Christian Hendricks, VP Interactive Media, to take over the day-to-day running, putting more emphasis on the digital part of the business and also slimming down the newspaper portfolio.

Few Wall Street analysts have had anything good to say about newspapers for so long now it’s difficult to remember the last really positive outlook for the industry as a whole, so it was somewhat of a shock when Credit Suisse analyst John Klim started his coverage of the sector by writing, “Tell the chaplain to save his eulogy, erase the ‘Dust in the Wind’ lyric from your short-term memory, and pull the obituary from tomorrow’s edition, because newspapers are not dead.”

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Large US Newspapers Had An Awful February -- Can Publishers Still Maintain Their 'Cyclical' Argument Or Is The Reality That Advertising and Circulation Revenues Are In Perpetual Decline With No Signs Of Recovery?
Advertisers gave most large US newspapers a financial thrashing in February, bringing shivers and chills to many boardrooms and on Wall Street. Publishers can’t do much more than pray that February is just part of the “cyclical” argument and everything will eventually get better. But what if February’s slump is not cyclical, but much worse – the formation of a new, much smaller, newspaper advertising landscape.

He gave outperform ratings to the New York Times Company and Gannett. Since those recommendations NYT has stayed basically the same but Gannett is up 2% on the back of a favorable Barron’s article; before the article it was down 0.5%. Klim rated the other companies he initiated coverage on as neutral.

It’s not as though Klim hadn’t done his homework. He wrote of the ailing within the industry – that 2006 was the first year since 1935 in which newspaper ad revenues fell and there was no recession to blame, and that he projects that revenues at the newspaper companies he is following will see a combined 5.8% revenue fall this year, and another 3.8% fall next year and that it has been at least 72 years since the industry posted three straight revenue decline years.

But he also reminded investors that newspapers today still remain cash cows – they generate a lot of cash flow – perhaps not as much as before but still a lot -- and newspapers remain highly profitable because of their cost cutting to keep margins as high as possible.

And he points out accurately that “millions of Americans will continue to seek local news and information, advertisers will want to reach these consumers, and the newspaper, in whatever form, fashion or iteration, will continue to bring these two separate groups together.”

So his bottom line – the industry downturn is more cyclical than secular. It’s the real estate and auto weakness causing the big problems and it’s not newspaper industry fundamentals themselves that have gone sour.

The big questions on that, of course, is how long is a cycle and once the cycle recovers will all of that lost advertising actually return to newspapers or will some go elsewhere? Newspaper advertising performance has been drifting down for several years blamed on cyclical reasons, but it wasn’t all because of bubbles bursting in the real estate and auto business – even when those sectors were doing well there was an obvious drift of advertising away from newspapers and onto the web. But when the bubble did burst, particularly in real estate, newspapers got walloped.

So if the auto dealers and the real estate brokers are fixated on web advertising then newspapers must go after that business aggressively via their own web sites. They are no longer the only classified game in town. The competition is fierce for where buyers and sellers place those ads that once only went to the local print newspaper.

And there is an added threat to newspaper advertising. There is a definite trend for the transfer of some marketing spend to the advertiser’s own web sites – no need to go through a newspaper middleman in print or online -- to get their word across. Some of those sites do very well and as the marketing folks become more sophisticated with how they can use the Internet that will be one more thorn for newspapers, print or digital, to handle.

The Kelsey Group, a Princeton research organization, reinforces that bad news. It said in a recent survey, “The autos category, along with real estate and travel, has enjoyed the deepest, most sustained experience among all verticals in the shift online. For the auto industry, the Internet represents an ongoing battle between third-party sites, OEM sites and dealers. There is unlikely to be a winner-takes-all outcome. But who gets the upper hand depends, in part, on utility to consumers, ability to create a brand and degree of local interaction."

Kelsey’s bottom line -- the Internet's share of auto advertising dollars on a global basis will grow from 5% in 2007 to 13% in 2011. During the same period, traditional classifieds' share is expected to decrease from 14% to 10% and newspapers' share is expected to decline from 17% to 14%.

There is no clear signal on when there will be a recovery which is why most newspaper companies now won’t give forecasts beyond three months, but their last forecasts, for the beginning of 2008, were more of the same gloom from the last half of 2007.

Klim’s thesis is based on newspapers doing well in the future because they will have their digital act together. Digital now accounts on average for about 7% of a newspaper’s total revenue, and to become meaningful it needs to get up to the 20% range. But that needs to occur via large revenue growth in that sector rather than meager improvements offset against big print losses which then gives an artificial look to how well digital is doing.

As Klim said, newspapers need “to transform themselves from lumbering dinosaurs into nimble, multiplatform information providers capable of reaching customers in print, online, or by mobile download.”

An overall business recovery in itself will not save newspapers. Being able to prove to advertisers that newspapers – print and digital – provide the best value for money will be key as never before.

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With Gannett’s Capitalization Dropping $1 Billion In Four Weeks, With McClatchy’s Shares So Low There Is Talk Of The Family Taking It Private, Is There Anyone Out There Who Still Thinks This Is All Cyclical?

A media analyst for Credit Suisse put the cat among the pigeons last week by suggesting the deep malaise in the newspaper business was just cyclical giving public newspaper shares a big up day on that. But then as investors thought about it they were soon back to again dumping newspaper shares.