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July 18, 2006

New York Times: Still Struggling

New York Times (NYT) reported adjusted EPS of 46 cents in line with guidance. Most key financial measures closely matched analyst estimates including revenues, costs, and margins. As with Gannett (GCI) and Tribune (TRB), advertising and circulation trends were weak and there is no sign of an upturn. NYT and its peers continue to effectively reduce costs but these efforts are only to limit the damage from the weal top line environment. I see little reasont o be interested in shares of NYT or other newspaper companies which could still suffer significant multiple contraction as despite the secular growth challenges, multiples remain at the low end of historical valuations. I see no reason why multiples should not be reset lower....

Along with its earnings report, NYT announced the retirement of its CFO and a revamping of its NY printing facilities. There is nothing negative to read into the CFO retirement. The reorganization of the printing facilities will allow the company to consolidate its printing presses in its most modern facility and reduce the width of the paper from 54 inches to 48 inches in 2008 (same as USA Today is now and same as the Wall Street Journal will be next year). The printing changes will cost $150 million in capital spending although the net impact may be as low as $100 million as the older plant won’t require prior planned spending. Management said that the ROI on the change is 15% with a 5.5 year payback and annual savings of $42 million or 18 cents per share. This seems like a good plan despite the use of free cash flow although it does indicate to me that management expects revenue challenges to remain for the long-term.

Looking more closely at the quarter, The NY Times group was up slightly, the Regional newspapers and broadcasting were up low to mid-single digits and the New England group was down 10%. In general, real estate remained an area of advertising strength while auto and entertainment continue to be weak. Auto and entertainment and many other categories continue to lose share to the internet, a change I see as continuing in the future and permanent. New England should improve in 2007 as consolidation of retailers in 2006 will shift to expansion by national retailers like Nordstrom in 2007.

Digital continues to be a bright spot and NYT has a unique position among its peers with its national brand and separate platform in About.com. Revenues at the newspaper affiliated websites rose 25% in the quarter, while About.com had a 63% gain. The newspaper internet revenues are included in the flat overall revenue so in reality, print advertising trends are negative. Digital revenues now equal almost 8% of revenue, up 200 points from a year ago but still too small to lift the total company back into a growth mode.

TimesSelect now has 513,000 subscribers but only 37% are paying. The rest receive it as part of their print subscription. Growth is not high but there are benefits from subscriber retention and the ability to sell Times Select online inventory at premium prices.

Looking ahead, management did not tweak guidance beyond the reorganization of its printing presses. This means more of the same for the rest of the year. That won’t be enough to get the stock moving. In fact, July is off t a slow start, described as "challenging" by management. This could lead to estimates coming down slightly.

Posted by Steve Birenberg at July 18, 2006 01:48 PM in NYT