Publishing Industry

Publishing Industry in Crisis - Business Model Lags Changing Times

The sinking economy is forcing many publishing houses to the life-support of bankruptcy after a long illness. The eight-year deceleration in print advertising, fueled by a secular migration of readers to the Internet, has gone into free fall.

Newspapers have fared far worse than magazines, as web-based news options have proliferated in recent years. Circulation of newspapers fell 2-3% on average each year from 2005 through 2007, and that has accelerated to the mid-single digits in recent months as the economy cratered. Ad revenue is falling between 15-20% or more at many publications. A portion of classified has moved to wider-spread, more targeted, lower-priced or free options, such as ebay or Craigslist, and will not likely return.

In an effort to offset declining print revenue and market share, publishers are scrambling to leverage their brands and build complimentary web-based publications. But the deepening recession has highlighted the flaw in the online ad-only business model -- without circulation to smooth revenue, cycle downswings are often deathblows.

Ultimately, the secular downturn in circulation will force a viable new business model for online news, one that relies on subscription or one-time user fees in addition to advertising revenue. In the meantime, publishers are scrambling to slash costs fast enough to meet falling revenues. Asset sales, even at trough valuations, have proven a less viable option in the midst of tight credit markets. Those that can’t cut fixed operating and financial overhead are filing for bankruptcy or closing, including many of the country’s largest and most respected newspapers.

What surprised many when the The Tribune Company, owner of the Los Angeles Times and Chicago Tribune, filed for bankruptcy in January, now seems like a weekly event.   

• This week, Hearst Corp. announced that it will shut The Chronicle, the 12th-largest U.S. paper and Northern California's largest daily, if it does not find a buyer or work with unions to dramatically slash costs. The closing of the 144-year old San Francisco daily is an event that would have seemed unthinkable until recently.    
• Also this week, Philadelphia Newspapers L.L.C., which owns The Inquirer, the Philadelphia Daily News and Philly.com is filing for bankruptcy. The Journal Register, owner of 22 dailies in the East and upper Midwest, including The New Haven Register, succumbed under the weight of crushing debt, as well. E.W. Scripps (SSP - Analyst Report) announced it would close The Rocky Mountain Register, the Pulitzer prize-winning 150-year old Denver institution, after failing to find a buyer. Just last week, Scripps shut down the The Albuquerque Tribune on February 23, 2008, after shopping it since August 2007.    
• Last month, The Star Tribune, owner of Minnesota’s largest newspaper, and the tenth-largest Sunday paper, filed Chapter 11, as it attempts to cut financing and labor costs.    
• The Christian Science Monitor stopped publishing in print and is now online-only.

Publicly-traded publishers sowed the seeds of their current liquidity crunch by leveraging their balance sheets to buy back stock and increase dividends in an attempt to prop up shareholder returns as revenue growth decelerated over the last several years. Now those same companies are slashing dividends, negotiating with creditors, and deeply cutting their workforces in an attempt to forestall bankruptcy. The New York Times Company (NYT - Snapshot Report) suspended its dividend this month, after raising it 31% in 2007. Gannet slashed its dividend by 90%. Lee Enterprises (LEE - Snapshot Report) deferred payments on some of its debt until 2012.

Stock prices have tumbled with earnings. The Zacks’ publishing index is down 80% from its 52-week high. A revitalized ad market requires an economic upturn, to which there is no visibility at this time. Until there is some visibility to stabilization, we would not recommend buying shares of any of the publishing companies in our coverage universe (remain underweight).

Our top Sell recommendation in the Publishing sector is McClatchy Company (MNI - Snapshot Report). As expected, McClatchy eliminated its dividend in January, shortly after a 50% cut in September proved insufficient.

We expect more pain ahead for McClatchy. One-third of MNI’s revenues are in the hard-hit California and Florida markets. Circulation revenue is falling for the 3rd consecutive year, while ad revenue sinks disproportionately (down 21% in 4Q08). In our view, MNI can’t shrink its costs fast enough, posing a risk of tripping bank covenants if the revenue decline should accelerate and thereby raise leverage. Given the continued downward trend in earnings and cash flow, coupled with the company’s high debt-load (Debt/TTM EBITDA was 5.1x).