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April 20, 2007

New York Times: Still No Upturn in Sight

New York Times (NYT) reported mixed 1Q07 earnings. Results were basically in line with analysts estimates and recent management commentary but there were no signs that print advertising was stabilizing. Additionally, management lowered its forecasted growth rate for internet advertising in 2007 from 30% to something less than that without specifying a figure. Put this together and the moderate downtick in the shares today seems like the correct reaction. There is nothing going on at NYT that gives hope for the short-term and long-term initiatives to reduce the dependence on print advertising, while numerous and successful so far aren’t yet large enough to move the overall corporate results. I'd remain on the sidelines in NYT....

1Q07 EPS were 25 cents, slightly ahead of consensus of 21 cents. Revenues of $786 million fell a little short of the $797 million consensus estimate. The headline figures imply good controls and that was in fact the case. Excluding a one-time item that drove depreciation expense up 25%, total operating costs fell 2.3% led by an 8.5% drop in newsprint expense. Excluding the decline in newsprint expenses, operating costs fell by about 1.3%.

Unfortunately, advertising trends in the print publications remain very poor. Declines I low to mid single digits were evident in New York, Boston and at the regional papers. Boston showed a positive comparison but that was solely due to Easter timing. The problems remain retail and classified advertising. National ad trends were mixed but leaned to the positive side.

Internet advertising continues to grow rapidly but still only represents 9.5% of total revenue. During the quarter, About.com saw revenues increase almost 24% while the internet revenue from the newspapers rose by over 21%. These growth rates represent a modest slowing in growth and probably explain the reduction in the forecasted growth rate.

At 10% of revenues, a 20% growth rate in internet revenues adds 2% to the overall corporate rate. This is chewed up by a 2% decline in print revenues, something that still should be expected for the balance of the year. It is plausible that with organic growth and tuck-in acquisitions that overall corporate revenue growth could turn positive in 2008 assuming that internet advertisng can sustain a 20% growth rate.

Given this scenario, EBITDA growth should stabilize and the newly instituted dividend should be secure.

NYT has a very valuable franchise that is effectively being transitioned to the web (NYTimes.com is the 12th most visited site on the net). Additionally, management is being smart about tuck-in acquisitions and product development in key areas of strength like entertainment, fashion, and books.

This could get me interested in the stock at the right price but I still think that newspapers are headed toward trading at 6 times EBITDA, similar to other slow growth telecom and media assets. Until NYT and other newspapers stocks approach that level, I see little reason to be interested in the group.

Posted by Steve Birenberg at April 20, 2007 09:31 AM in NYT