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Tuesday, July 11, 2006

Newspaper Earnings This Week and Their Implications

Main Stock Tickers: CGI, JRC, MNI, TRB, GOOG, YHOO, TSCM, CNET, NYT, TWX, NWS

We are officially in earnings season. On Wednesday and Thursday we should get a peak into earnings out of what the street calls Old World Media and how the continued migration of ad-dollars have gone from papers and magazines into online ad spending. It also offers a peek into Old World Media's relevance and what they have to do now to survive.

It is no secret that online ad spending has been the winner and has grown year after year. It also goes without saying that newspapers have been the group that has been losing so far. On Wednesday, Gannett (GCI) reports earnings and on Thursday we get earnings reports from Journal Register (JRC), McClatchy (MNI), and Tribune (TRB).

Where is the Ad Spending Going?

The areas that have been continually affected have been in nationwide print ads and in classified spending. Real estate ad spending has been the one area that papers have been able to partially rely on, but if a weaker housing market persists you may wonder how long that can continue. The nationwide ad spending and auto classifieds have definitely migrated to the Internet. There is a myriad of auto sites online and about the only thing you have to do in researching a car and the market now is the actual test drive. This is becoming more and more true in real estate as well. Many home buyers now do 100% of their research online by looking at prices and doing virtual tours.

Street Expectations and What to Expect

Tribune has recovered sharply off its lows, but they are involved in in-fighting right now with large stakeholders who want to liquidate at higher prices. Journal Register (JRC) already noted a decline in ad spending and put earnings at the lower-end because of its exposure to Michigan. McClatchy (MNI) is going to be the most difficult to assess because of its acquisition of Knight Ridder and the subsequent divestitures it has been pursing. Gannett also said last month that it could miss the consensus estimates.

Gannett is expected to post $1.31 EPS on approximately $2 Billion in revenues.

Journal Register is expected to post $0.31 EPS on revenues of about $143 million.

Tribune is expected to post $0.56 EPS on about $1.5 Billion in revenues.

McClatchy is expected to post $0.88 EPS on just under $339 million in revenues, but this number fluctuates now because of acquisition and divestitures.

All of these organic results will once again be lower than the readings last year, assuming the projections from the street come right in-line.

What the Analysts Have Recently Said to Expect

By and large, research reports from source to source put earnings growth anywhere from -1% to +1%, and finding any overwhelming bullish call is more than difficult. JPMorgan expects -1% for the sector, although it thinks Tribune (TRB) has a shot at some upside. Bear Stearns sees a flat to modest single-digit ad revenue growth in the quarter and Merrill Lynch sees volatile spending as well that will average about 1% growth.

Will the short interest be a harbinger or a reverse indicator?

Gannett (GCI) saw its short interest in May of 4.8+ million shares to 5.01 million shares in June, or about 2.1% of its float. Journal Register’s (JRC) short interest in May was 3.05 million and that grew to 3.23 million shares in June, or 9.1% of its float. McClatchy (MNI) saw its short interest of 4.8+ million shares in May grow to 5.3+ million shares, or 22% of its float. Tribune's (TRB) short interest grew from May's 5.6+ million shares to 8.01 million shares in June to about 3.6% of the float. This was also after a period that the underlying shares were going up on merger hopes, spin-off or break-up hopes, and share initiatives.

Since this is comparing the old world to the new world, we should note the short interest changes in Internet names. Google (GOOG) saw its short interest of 4.1+ million shares in May grow to 6.28 million in June, about 2.9% of its float. Yahoo! (YHOO) saw its short interest of 78.2 million shares in May grow to 81.2 million shares in June, or about 6.4% of its float.

Even after looking at some other online comparables to see who else may have some pure online plays, there were increases in short interest. Thestreet.com (TSCM) saw its short interest of 756,000 in May grow to 930,000 in June, or about 4.79%. CNET Networks (CNET) saw the May short interest of 10.17 million shares grow to 10.57 million shares in June, or 8.7% of its float.

Keep in mind that the short interest data is about 3 weeks old now.

Migration

What is the future of all media? In truth papers will still be here, but they will change and will change drastically. These companies themselves have been looking into online ad initiatives and increasing online offerings, and that will most certainly grow. The New York Times (NYT) has been perhaps the most praised so far out of any newspaper companies on growing their online subscription offerings and initiatives. Other newspaper publishers will likely mimic and try to improve upon this, above and beyond what initiatives have already been started.

Blogosphere versus Old World Media

Interestingly enough I went to an event a few months ago in Chicago that was sponsored by the Chicago Council on Foreign Relations. The topic was blogs versus papers. While two participants are not enough to form a consensus at all, it was interesting to see how the old world media reporter was so far behind and was willing to admit that they had fallen behind. The biggest problem in the blogosphere is that there is still an ongoing credibility issue, which isn't surprising since so many bloggers are by and large unknown and their underlying intentions are not always known. Most readers are willing to instantly believe all facts noted by reporters in newspapers, even after some blatant examples of fact-fiction.

What is ultimately true is that there need to be more partnerships. Old World Media needs to do more to shed its image and bring in more partnerships and they need to create more alliances with newer forms of online media. This can be done with some of the dominant players, but in truth newspapers will ultimately have to take on smaller cadres of partnerships to see which can offer the most leverage so they can recapture some of what they gave up to the online behemoths.

Ad spending on Google, Yahoo!, Microsoft, and AOL accounts for the bulk of online ad spending in the US. Newspapers can go try to create partnerships with them, but partnering with newer and more nimble groups may help them recapture more and more. Google also recently hinted that it was not happy with their progress made in its excess classified and print ad efforts it experimented with the Chicago Sun-Times. Partnering with these smaller groups will also be the most cost effective measure for newspapers.

Whatever the path happens to be, the newspapers will try different avenues to regain some of their market share for ad-spending dollars. This may also change some of the analyst models out there as they will have to move away from the old ad-lineage spending.

Time Warner (TWX) has a combined old-world and new-world model, as does News Corp. (NWS) with its MySpace.com. There will be many more deals struck in the coming months, and it will be interesting to see which models get chosen by each newspaper and media company.

You could perhaps make many other comparisons for the myriad of radio and television ads as well, but we can compare that data when the flood of earnings comes out from that group.

Jon C. Ogg
July 11, 2006
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