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September 17, 2007

NY Times Shares at 20 Year Low!

New York Times shares traded below $20 yesterday for the first time since April 1997. As recently as June, NYT was over $26. The stock was over $30 almost two years ago exactly. In 2002, NYT shares briefly traded over $50.

NYT's fall yesterday was matched by new lows for McClatchy and Lee Enterprises. Gannett held just above the multi-year low it made in early August. The culprit for yesterday's action was a downgrade to sell for NYT, MNI, and LEE from Merrill Lynch analyst Karl Choi. The impetus behind the downgrades was a lowering of Merrill's 2007, 2008, and long-term newspaper advertising growth rates. For 2007, the forecast now calls for a 7% decline vs. a 4% decline previously. The 2008 forecast is now -5%, down from a decline of under 1%. While Merrill looks for a slight rebound in 2009, the long-term forecast is now for an annual drop of 1% in newspaper advertising. These forecasts include the benefit of growth in the industry's online advertising revenue.

Massive market share loss in classified advertising to the internet is the secular headwind that is killing newspapers. In 2007, total newspaper advertising is expected to be about $46 billion. Classified represents about $11 billion, with real estate and help wanted around $4 billion each and automotive around $3 billion....

....Newspaper auto advertising has been falling since 2004 with the rate of decline accelerating each year. This year, Merrill Lynch is forecasting a 19% decline with 2008 moderating to a 12% fall.

Help wanted is also declining and while the decline may have a greater cyclical component, secular share loss is a significant part of the problem. Employment advertising turned negative in 2Q06 and the decline has steadily worsened, ending in a 2007 forecast of -16%. Next year, Merrill is forecasting -14%.

The real killer, now and for the foreseeable future, is the downturn in real estate ads. Again, the problem may be more cyclical than secular but like automotive and help wanted there is an unmistakable trend toward online ads. In 2005 and 2006, real estate ads grew by 10-11%. The downturn began in 4Q06 and the deterioration was so rapid that 2007 may see a decline of 20%. With no housing upturn in sight, a forecast of another 20% decline in 2008 seems plausible.

Add it up and roughly 25% of the newspaper industry's advertising revenue is declining by 15-20% in 2007 and 2008. The multi-year secular decline in auto advertising is probably a harbinger of what is coming for real estate. In other words, classified advertising is likely to fall beyond 2008, making Merrill's forecast of -1% annual advertising growth long-term seem pretty realistic.

With newspaper stocks trading at 6-7 times Merrill's below consensus 2008 EBITDA estimates, I still don’t think they are cheap enough to bottom despite the fact that what you have just read has quickly become conventional wisdom. Negative revenue growth means declining margins and pressure on free cash flow. There has been lots of chatter on this site about financial stocks as a value trap. Look no further than newspapers for a value trap that is not open to debate.

Posted by Steve Birenberg at September 17, 2007 03:23 PM in Newspapers