After several years of bloodletting, the hemorrhaging appears to have been stanched in the U.S. newspaper industry.
Major publishing companies are showing some of the first signs of improvement in advertising revenue since the economic downturn in 2007. The numbers are still decreasing, but the declines are levelling off, as auto makers, financial institutions and luxury retailers have begun to spend more on print campaigns.
"Things are slowly turning around," says John Miller, senior vice-president and portfolio manager at Ariel Investments, a Chicago-based firm that holds about 5 per cent of the outstanding shares of Gannett "We're beginning to see some of the traditional advertisers return. It's just a matter of time before we see print advertising growing again."
The value of newspaper stocks plummeted in 2007, hitting dramatic lows in March, 2009. Gannett, for example, tumbled less than $3 (U.S.) from nearly $50 (U.S.) in that period. Prices have regained some ground with the recovery, but have come under pressure since the market correction began in April.
Investors were surprised last week when New York Times Co. posted a 1-per-cent increase in revenue, the first rise in three years. Gannett, publisher of USA Today and dozens of other newspapers, beat profit expectations after print ad revenue fell by 6 per cent, representing the fifth consecutive quarter of decreasing losses. The Wall Street Journal, meanwhile, says advertising revenue rose 11 per cent in the second quarter. On Thursday, McClatchy Co., publisher of the Miami Herald, is due to report results.
Some analysts say the worst appears to be over for newspaper publishing companies. Advertising is improving with the economy and during the bad years management was forced to chop expenses and debt and find new revenue opportunities in the digital world.
"The newspaper sector is slowly surviving," says Edward Atorino, managing director of equity research at The Benchmark Co. LLC in New York. Investing in these companies "is still an act of faith," he adds. "The best one can say about them is that they are declining less."
A few years ago, advertising revenue was tumbling by 25 per cent a quarter. That figures has shrunk to about 5 per cent for the sector now and could flatten by the end of the year, before rising in 2011. Circulation trends are still unfavourable as readers shun newsprint for the Web. But readership numbers are "getting less worse," Mr. Atorino says. At the same time, gains in digital operations are starting to matter more as they develop into significant portions of overall businesses. At The New York Times, for example, digital advertising now accounts for about 20 per cent of overall advertising, he says.
Mr. Atorino's favourite in the sector is Gannett, which is the only one he rates a "buy." The company's broadcast and digital units are offsetting declines in publishing. It has the strongest balance sheet in the sector after paying off about $1-billion of $3.6-billion in debt over the last year.
Strong TV and digital growth underscore an increasingly diversified revenue story in which investors are being asked to pay very little for a potential cyclical turn in newspaper advertising. Douglas Arthur, Evercore Group analyst
"With 85 daily newspapers in relatively small markets across the U.S., Gannett has an unparalleled presence as a local advertising medium, compared with other newspaper publishing companies. Consequently, we believe Gannett should participate in any recovery in newspaper advertising," Mr. Atorino wrote in a report last week.
Gannett trades at five times his 2010 earnings-per-share (EPS) estimate of $2.46, compared with a multiple of 13 times for the average stock on the S&P 500 index. That discount is warranted given the decline in newspaper advertising and uncertain strength of any turnaround, but seven times EPS is a more reasonable multiple, resulting in an $18 target price, Mr. Atorino says.
Gannett is the favourite of most other analysts too. Six of eight rate the stock a "buy," with two analysts maintaining a "hold" on the stock.
"Strong TV and digital growth underscore an increasingly diversified revenue story in which investors are being asked to pay very little for a potential cyclical turn in newspaper advertising," Douglas Arthur, an analyst with Evercore Group LLC in New York, notes in a report. He also has a price target of $18 on the stock.
James Goss, of Barrington Research Associates Inc., upgraded Gannett's stock last Friday to "outperform" with a target of $21, based on a multiple of a little less than nine times estimated share profit for this year.
Mr. Miller says Ariel Investments is weighing a possible investment in New York Times Co., in part because he thinks new technology such as Apple Inc.'s iPad will give a surprise boost to the sector.
Analysts are less warm to the stocks of New York Times and McClatchy at the moment. Mr. Atorino has a "hold" recommendation on both, citing the "still-uncertain timing and strength of any turnaround." He thinks NYT is fairly valued at 16 times estimated share profit for 2010, reflecting a price of $11 a share.
McClatchy, he notes, carries $1.9-billion in debt and operates in some tough markets, including Florida, making it a riskier holding.