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Wednesday, July 12, 2006

Gannett: Canary In the Coal Mine For Newspapers

Stocks: (GCI)(MNI)(TRB)(NYT)

Gannett announced Q2 earnings today, and the fundamentals of the newspaper industry continue to deteriorate. Because Gannett is the largest paper and broadcast company, it is unlikely that other companies like McClathchy (MNI) or The New York Times (NYT) are likely to break the trend in Gannett's Q2 numbers.

Although revenue rose slightly, 6% to $2.03 billion, operating cash flow fell from $624 million in the quarter last year to $606 million in Q2 06. Net income from continuing operations fell nearly 7% to $310 million.

The bad news for Gannett and all other newspaper and broadcast chains is that Internet revenue is still not high enough to offset falling circulation and advertising revenue at papers. In June, Gannett's paid circulation for all papers fell an aggregate 2.4% continuing a trend that began more than a decade ago for most newspapers.

Printing and delivery prices are also rising because both are related to the cost of oil and gas. If oil spikes higher and closer to $100 for any period, margins will erode further.

Two issues are raised by the Gannett numbers. The first is when will internet revenue from online verions of newspapers begin to offset eroding revenue from print products. The second and perhaps more pressing issue is whether falling number at all newspaper companies will force additional liquidations of large companies in the industry ala Knight-Ridder. If so, The Tribune (TRB) may be the next to go, and there have been many discussions on the street that it is next.

Douglas A. McIntyre can be reached at He does not own securities in the companies he writes about.

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