The Subprime Financial Crisis Claims Another Victim – Newspapers

Philip M. Stone January 11, 2008

It’s only the second week of the new year yet already forecasters are dramatically lowering their already low forecasts for newspaper advertising, not the least reason being the subprme crisis effect on real estate that in turn has led the savaging of newspaper classified advertising.

Many newspaper share prices that one never thought could really fall as low as they have, reached new 52-week lows Wednesday as Wall Street analysts busily lowered their share price targets. If this is all cyclical , as many newspapers publishers claim, then it’s a mighty-long cycle and with the “are we/aren’t we in recession” debate in full swing that cycle is going to get a whole lot longer!

And if that wasn’t all bad enough Bloomberg is out with a damning commentary that the balance sheets of many newspaper publicly traded companies are carrying overbloated goodwill and other such intangible assets as a substantial part of their finanicals, and those numbers show little reality to the facts. Take one example the Bloomberg piece cited: “Consider just one line from Lee’s financial statements called customer and newspaper subscriber lists. Lee valued these assets at $846.9 million. So, in Lee’s views, these lists by themselves were more valuable than what the market says the entire company is worth.”

It all boils down to how the markets value a business as compared to how a business values itself, but examples like that must mean that newspaper groups are surely looking at their balance sheets as required under accounting rules and the likelihood is that big writedowns are on the way.

The theme for this week’s downgrading of newspaper shares is best summed up in the title of the report by Goldman Sachs (GS), “Reducing Estimates (again)”. GS is already on record predicting the US will skip into recession later this year and so has accordingly tripled the damage it believes will hit the newspaper industry this year, going from a previously forecast 2.9% drop to a huge 7.9% fall. Add that to the 2007 advertsing percentage drop that is still being officially compiled but expected to be at least 7% overall, and that’s a huge two year dip. 

GS analyst Anthony Noto saw classifieds really suffering. “We expect the classified categories to be very weak with the real estate, help wanted, and auto categories particularly sensitive to broader economic activity.”

The real estate fiasco in particular is killing newspaper companies such as McClatchy that have a large presense in Florida and California – two of the hardest hit subprime states. Its newspapers in those two states are to blame for about 70% of the fall in McClatchy’s revenues because the real estate advertising is off so sharply. In Q3, 2007, the last reporting period, real estate classifieds overall for US newspapers fell nearly 25% compared to a year earlier, according to GS.

Sue Clark-Johnson, who has announced she is retiring in May as the president of Gannett’s newspaper division, warned analysts a month ago that Gannett was seeing just about every retail business segment being hit, and that in turn was not going to do newspaper advertising any good.

The bottom line from GS is that 2008 will see the worst newspaper revenue performance since 2001.

Analysts are also taking a close look at the New York Times Company in particular and looking in their crystal balls they see little good. Bank of America analyst Joe Arms particularly warns his customers not to be misled by what seemed a partial recovery in the Times’ third quarter earnings.

He said that while national advertising increased “we wonder if investors have been lulled into a false sense of security. In our view, the risk of a broader economic downturn suggests to us that the company’s estimates are most at risk relative to current consensus levels.”

What most worried Arms is that the Times in particular relies on luxury goods advertising but he said a check of the Mastercard SpendingPulse report showed a 2% decline in luxury goods sold during the Christmas season. Movie advertising is also very important to the Times, yet box office revenue dipped 4% in Q4. Since luxury goods and movie advertising together make up about 20% of The Times’ revenue his view is that  when those two sectors sneeze the entire newspaper catches cold.

With a “sell” recommendation Arms concluded, “The risk of broader economic weakness suggest to us that there is significant probablility that the newspaper’s revenue outperformance gap is eliminated as categories like luxury advertising fail to provide an ongoing lift to results.”

Throw all of that into the mix and it is little wonder that by Wednesday shares of the New York Times Company, Gannett, Lee, and McClatchy had hit 52-week lows. All recovered some on Thursday, but even so the New York Times Company at $16.15 is down 7.5% % just this year alone. ; Gannett’s close of $33.55, is down 14% this year alone, McClatchy’s close of $11.45 has it down this year 8.6%%, and Lee Enterprises at $11.12 has it down a whopping 24% this year – the Bloomberg commentary doing it no good!

Remember back in October Morgan Stanly Investment Management finally dumped its 7.3% holding in the New York Times Company when it gave up on persuading the Sulzbergers to change the two-tier share system, selling some 10 million shares at around $18.30? Well that is11.8% above Thursday’s close going to show how the financial people understand that no matter how low you think a share is, there’s still plenty of room for it to go lower.

And then there was the big bounce Belo got October 1 when it astounded Wall Street by announcing it was going to split itself into two separate companies, basically isolating the poorly producing newspapers from the rest of the company, and analysts and investors alike thought “What a great idea”. Well, three months later the shares stand at $15.38, which is11.4% lower than the day before the company made its announcement and 25.4% down from the day of the announcement. In other words all that bounce is gone and then some, and what a great selling opportunity that announcement turned out to be (pity those who saw it as a reason to buy newspaper shares!)

So while it is true the Dow Jones Averages themselves are down 3% this year alone, the newspaper companies are continuing their downward trend of “outperforming” the Dow.

With the forecasts and analysts as negative as they are, 2008 is already shaping up as yet another year for newspapers to continue their cost-cutting exercises in the hope of maintaining current margins -- the fat is mostly gone already so now it is a matter of really digging into the meat, many will argue that has already occured. At the same time publishers must hurry to implement more policies that will enhance their digital revenues as never before.

If rate cuts and economic incentives do not stop the fall into recession as Goldman Sachs suggests – and remember GS was smart enough to avoid the subprime mess -- then this could well be a very ugly newspaper industry year.