Newspapers Show Some Improvement, Wall Street's Not Buying It

As the newspaper industry prepares to brief securities analysts on its mid-year outlook, market conditions have improved for many top publishers (see related New York Times Co. story in today's edition) as some key print categories have stabilized and as online revenues soar, but Wall Street remains circumspect. If anything, they say the medium's woes are worse than at the same point in 2005, a year in which ad spending rose only 2 percent for newspaper publishers overall.

"As we anticipate the mid-year media review next week, we do not expect many management teams to express a lot of conviction in the near term fundamentals of the newspaper business," writes Merrill Lynch analyst Lauren Rich Fine's team in a sector update released early today. "Yes, most companies have reported May newspaper ad revenue results that were better than the flattish year-to-date trends observed through April; yet, we think it is premature to conclude the acceleration as a trend.

Fine indicated the firm was reserving judgment until June ad figures are released, but the report generally makes a case against significant improvements for the rest of the year.

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The Merrill Lynch report follows an even more dour tome released earlier in the week by Deutsche Bank's Paul Ginocchio who concludes, "Our view of the second half advertising dynamics remains somber. We think large markets will continue to face the bleeding edge of the shift of readers and advertisers to the Internet."

Ginocchio has been expressing significant concerns over the impact of consolidation within the retail industry, especially the likelihood that Federated Department Stores will cut spending and shift a significant share of its ad budget out of newspapers.

"We think Federated will start to shift its media mix away from newspapers this fall, and in general, retail advertising will remain in a state of malaise," he wrote, noting the problem would be complicated by circulation growth problems. "The environment will get harder for newspapers before it gets better. And we're not sure when it is going to get better."

Like Deutsche Bank, Merrill Lynch expects online to be the primary bright spot for newspaper publishers for the foreseeable future, not simply for ad market share, but as part of a broader transformation of their publishing and business platforms.

"While the Internet has created much of the turmoil the newspaper industry faces, it is also the area of purest and fastest growth, at present. Companies are likely to emphasize not just the 30 percent plus growth of their online ad revenues but also the multitude of strategic investments they have made," noted Merrill Lynch's Fine, adding, "We expect to hear about e-Ink initiatives as well. We applaud these efforts and believe they are essential, but need to note that the core print business is under some real pressure."

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