Is Wall Street Premature In Hiking US Newspaper Share Prices?

Philip M. Stone January 28, 2010 Follow on Twitter

US newspaper share prices are on the rise since the depths of last March -- McClatchy shares then hit 35 cents each but now they hover near $6; Gannett sank to $1.85 but now is around $16; and the New York Times that saw $4.12 now is more than $13. Wall Street apparently thinks the worst is over, but is it?

McClatchy shares soared by some 25% in the first 10 minutes of trading Wednesday before falling back some because the newspaper company announced that its net advertising revenue had dropped by only 20.5% -- the market had been looking for anywhere from 20% – 25%, so Wall Street read in that 20.5% that the advertising downturn is really slowing. And Wall Street liked even more that McClatchy cut its Q4 cash expenses by 26.1% -- some $390 million – and has promised to cut costs by another 20% in Q1, and that cost slashing meant a $32.4 million profit. Yes, profit. Hallelujah!  Shares of other newspaper companies clung to the McClatchy petticoat and rose, but at far less percentiles.

But none of that hides the fact that for newspaper companies to be doing well today means continual ferocious cost cutting. The revenue side is still way down, as McClatchy showed, but the better bottom line is because costs have been slashed so much. For Q1 McClatchy is still forecasting a revenue drop, but less than before – somewhere in the low to mid-teen percentile -- and the cost cutting continues.

That seems to jive with a report from Standard & Poors that says newspapers in 2010 will continue to see declining income and the only snippet of good news in that is that the decline in percentage terms will not be as great as 2008. But it’s still going down. And once rock bottom has hit S&P doesn’t see any fast recovery. It believes newspapers are going to sit at that bottom for some time to come as advertising money continues to shift to digital platforms.

Many of the big advertising agencies seem to think that newspaper advertising will drop around 10% this year compared to the near 30% in 2009, and the McClatchy Q4 revenue decline is certainly making those forecasts look possible.  McClatchy that has seen its share price jump some 17-fold since its March low has said it is looking for more big savings in Q1 and is already busy cutting jobs – a sign that publishers still are not seeing a positive  advertising forecast, but, yes, the decline in percentage terms is diminishing. In the past 18 months or so McClatchy has eliminated some 9,000 jobs – about one-third of its workforce.

Its flagship Sacramento Bee has announced a fourth round of job cuts – this time 25 to be gone by the end of the month. No reporters, but photographers, copy editors and designers are particular fair game. The  Ft. Worth Star-Telegram has announced 28 staff will be let go plus another 17 open jobs will go unfilled; its Lexington Herald-Leader has announced eight jobs will disappear, another six open jobs will go unfilled, and most employees will be taking a one-week unpaid furlough before July, and other McClatchy newspapers are announcing similar layoffs. 

Lexington publisher Tim Kelley summed up for his newspaper and what probably is true for the others in saying that the advertising revenue trends are looking better but “revenue is still in negative territory and we need to take these actions to address these shortfalls.”

And it is not just McClatchy.  Gannett, the largest US newspaper publisher with 85 dailies, says that nearly all of its 31,000 staffers must take a one-week unpaid furlough before the end of March.

Even newspapers newly out of bankruptcy with finances supposedly adjusted so they can make a go of it, are cutting back even more. Journalists at the Minneapolis Star Tribune went on byline strike Tuesday in opposition to 29 newsroom staff that management is giving the boot to.

The Paper Cuts web site says that 14,861 US newspaper jobs were lost in 2009, a slight reduction from the 15,984 lost the year before.  And already, it says, there have been 300 layoffs this year. That doesn’t show a revenue recovering industry, but rather an industry that has cut and cut and cut to get to the point that the revenue and expenses are in some synch with one another.

There are some other positive signs emanating with McClatchy. It seems to have avoided going the “prepackaged bankruptcy” route and has negotiated better long-term deals with its lenders. The Fitch ratings agency had put some $2 billion of McClatchy’s junk debt on “positive watch” meaning Fitch thought the company could negotiate with its lenders on not going into bankruptcy, and that’s exactly what has happened.  McClatchy says it is buying back  most of its bonds due in 2011 and 2014 that had been rated as deep junk, and those 2011 bonds not bought will be extended through 2013. To buy the old debt McClatchy is issuing $875 million in new bonds due in 2017, so overall the company has bought itself a lot of breathing space for the advertising economy to recover.

The US Supreme Court, of all people, handed the entire media industry some “good news” last week when it ruled corporations can fund political campaigns without financial limit, lifting restrictions set previously by Congress.  That means, for instance, a health care company could run unlimited advertising supporting a candidate who doesn’t support health care reform and indeed it could run unlimited ads against a candidate who did support such reforms. There can be little doubt that incumbents and new candidates will be keeping their eye on those corporate donations, especially in the closing days of a campaign when those additional corporate dollars could help make or break the winner.   

Television will probably be the biggest beneficiary of those additional corporate dollars, but newspapers will not get left out. It will be interesting to see how newspapers overall editorialize on the issue of whether lifting those restrictions is good for democracy even if good for newspapers. Those who say the decision is further proof of free speech obviously say “yea” whereas those who fear the influence of “big money” buying even more democracy than it does already will obviously say “nay”.

And further good news from the Newspaper Industry Report by W.B. Grimes and Co., newspaper brokers who concentrate on smaller community newspapers, that newspaper prices seem to be firming although buyers remain hesitant to take on the debt. “Buyers are now comfortable paying 5X-6X adjusted earnings for market leading weekly and daily newspapers. This seems to jive with the comfort levels many banks are seeking.  Although we've seen a noticeable pick up in calls from buyers, many (and this includes a great number of groups) still appear hesitant to pull the trigger on deals. This despite the fact that many of these deals are truly strategic buys and deals that can be done today at a significant discount to what they would have cost just two years ago. We said this last year, and we'll say it again, for many of these groups, they are delusional if they think they can significantly grow their top and bottom lines simply through nurturing what they already publish.”

And if groups aren’t buying what about individuals, especially with seller-financing available?  “It is true many sellers are prepared to consider financing a portion of their transaction. We are finding, however, a high percentage of buyers seeking seller-financing, can't put up a decent down payment, really don't have the financial wherewithal to carry the newspaper in the event of a downturn, and can't offer much, if any, in the way of collateral to a seller. There is no reason for a seller to offer to finance a deal, if the buyer is financially unqualified.”

Wall Street acts on what it believes will happen in the future -- in the case of newspapers perhaps the far future -- but then the prices had sunk ridiculously low to begin with and thus the current uplift in public newspaper share prices. But read the forecasts by the advertising community that there is still more decline to come in newspaper revenue before the rot stops and there is no telling how long it will take, if ever, for print revenue to start climbing back again.

What’s different now as opposed to a couple of years ago is that the cost side has been whacked really hard so there is some financial sense today to the newspaper business. But it has been at a great cost in quality, whether it be more and more copy editing errors creeping into copy, local beats no longer covered, just plain thinner news holes, let alone a far more narrow-sized product.

But at least print newspapers survive, and that is something the digital folks have kept on telling us wouldn’t happen.