It’s Coming Up to Newspaper Q1 Earnings Reporting Time So If You Don’t Want To Know The Bad News Look Away Now

Philip M. Stone April 4, 2008

The newspaper industry starts reporting its Q1, 2008 earnings in the next week and already the analysts are out with their predictions that basically say if you think last year was bad you ain’t seen nothing yet.

And perhaps the single most telling outlook for the fortunes of newspapers trying to weather a recession (doesn’t matter if it is officially called a recession or not, for newspapers it’s a recession) is from Goldman Sachs analyst Peter Appert who says that even though newspaper company shares are at the very low end of their historical valuations now is still not the time to buy – in other words he thinks they still have further to fall!

Of course there are limits to just how far down a share can go. Journal Register Company (JRC) closed on the New York Stock Exchange (NYSE) Thursday at 52 cents a share, that’s down 91% from a year ago. The NYSE has now given formal notice that if that share price doesn’t get back to at least $1 in the next six months then the company could be delisted. Its current market capitalization of $20.36 million represents a company owning 22 daily newspapers and 346 non daily publications. JRC says it intends to take actions to get the share price up to at least $1, but it could offer no guarantees it would be successful.

So into that environment the common view among analysts is that for Q1, 2008 the industry in general is going to show a 10% decline in advertising revenue from the year before.. And while newspapers continue to cut costs like crazy it’s doubtful their cost cutting will match the revenues that 10% will represent.

Figures already in for January showed an 11.4% decline and February was down 9.8% and there’s really nothing out there to indicate that March is going to be any better.

The credit rating agencies still paint a dismal picture. Moody’s lowered McClatchy’s  debt rating even deeper into junk territory – when it gets that low does it really matter that Ba2 is now down to Ba3? What does matter, however, is that Moody’s general outlook is negative and it calls into question whether McClatchy can maintain a comfortable liquidity cushion. McClatchy's revenue dropped 7.9% last year and is off 13.2% already this year. The company’s share price has lost 65% of its value in the past year.

The shares closed Thursday at $10.93 but Lehman Brothers analyst Craig Huber is telling his clients he believes they will dip to $5, and he cut his profit estimates for 2008 to 90 cents per share from $1, and for 2009 to 80 cents per share, from 85 cents.

Not very encouraging numbers and with all those headaches how goes McClatchy  CEO Gary Pruitt’s pay package? He made “only” $4.6 million in total compensation last year, down from $5.6 million in 2006 when he made the Knight-Ridder deal.

On Thursday S&P Equity Research downgraded The New York Times Company from Buy to Hold, explaining “Shares are up about 40% since mid-January, which we believe partly reflects what we see as NYT's relatively better ability than many peers to cope with secular industry changes by utilizing its strong brand and internet platform. We also note that NYT is less leveraged than most peers, which we think positions it well for pursuing online acquisitions.

“But on a weaker U.S. economic view, we see ad revenue declines detracting from gains previously anticipated from cost cutting. Thus, we are reducing our '08 EPS (earnings per share) estimate by $0.11 to $1.11, and cutting our target price by $2 to $21. For all of that the shares ended up Thursday by 2.93% to stand at an even $20.

Last month Moody’s said it had placed NYT’s debt ratings into review because it was concerned at the December and January double digit percentage  advertising revenue declines (February advertising revenue decline wasn’t so  bad at 6.6% down) , and Moody’s believes the near-term outlook for newspaper advertising remains weak.

John Janedis, Wachovia Capital Markets analyst, says he believes newspaper advertising in March was down from February and he remains cautious for April. He  also believes that “larger national advertising is experiencing the very early stages of a slowdown,"  and that would particularly hit the New York Times.

Burt for all of that there was some good earning news Thursday from the Denver Post (Media News) and the Rocky Mountain News (E.W. Scripps) that share business operations and split income from both newspapers under a joint operating agreement. They reported earnings of $27 million, a 48% increase over the year before.

But total  revenue was down 11% to $363 million, with advertising revenue down 14%. So how did earnings improve?  Obviously, from cost-cutting -- payroll and benefit costs were down 12.6% and newsprint costs declined a full 30%.

And it is that kind of cost-cutting that worries Lehman Brothers’ analyst Huber and his  analysis is spot-on. "We believe, once the economy improves, that newspapers will be at a worse competitive advantage for advertising and readership than they currently are, particularly vs. the Internet.

“The deep cuts newspapers industry wide are making to their editorial content - year-after-year but have accelerated over past year - should have long-term negative consequences for the industry."