NEW YORK: Goldman Sachs issued a chilling note today on trends in the newspaper industry raising severe doubts about near-term ad and revenue growth. It said revenue performance for 2005 will be at its worst level since at least 2001-2002.
"As investors think about the prospects for the newspaper sector (and the ad-based media sector broadly) in 2006," the note began, "we offer the following question: If publishers have struggled to post 2%-3% ad revenue growth this year in what should be the 'sweet spot' of the economic cycle, how likely is it that revenue growth will accelerate in 2006?
"Our answer: very unlikely. We think growth expectations may be too optimistic, with consensus calling for an average earnings gain of about 8%. While aggressive share repurchase activity should boost EPS in 2006, absent a pick-up in revenue growth, we are likely to see continued downward pressure on estimates.
"Accordingly, we continue to recommend investors stay underweight the sector."
Looking at ad and overall revenue trends, Goldman stated: "The newspaper revenue environment remains challenging, with 3Q ad revenues up 2.0%, the industry’s weakest performance in two years. This compares with 2.8% growth in the first half and 4.5% growth in 2004. Sadly, 2005 is shaping up as the industry’s worst year from a revenue growth perspective since the recession impacted 2001-2002 period, with no signs of improvement in the fourth quarter.
"In terms of the major ad categories, national continues to be the weakest link, with industry ad revenues tracking roughly flat for the year. Retail has softened as the year has progressed, with only classified showing healthy year-to-year gains (up an estimated 4%-5%, including online).
"We are trimming our 2006 newspaper ad revenue growth forecast to 3.5% from 4.0%. Key assumptions include national growth of 1.0%, retail growth of 2.5%, classified growth (print) of 3.6%, and online growth of 25%. While online growth is impressive, we estimate that it will only represent about 5% of industry ad revenues in 2006, not sufficient to move-the-needle in terms of overall industry growth."
Then, looking at cost trends, Goldman observed: "Although newsprint prices continue to move higher on a near-term basis (including a $35/ton announced price increase on October 1st), we believe we are in the last stages of the current newsprint pricing cycle. Consumption is now falling more quickly than production capacity, suggesting that the supply/demand equation may shift in favor of buyers (publishers) as we move into 2006. Based on data from Goldman’s paper and forest products research team, we believe newsprint prices will peak in the first half of 2006 and could decline modestly in the second half. At last a bit of good news for publishers!"
It added that Scripps remained its only "outperform rated name" in the diversified media sector.
