Every year, Goldman Sachs hosts the "Communacopia Conference,"
an investor gathering that focuses on various public companies
involved in mass media and advertising. The conference, which is
now in its 20th edition, is a real chance for firms to hobnob and
glad-hand, but amid all the buzz at this year's event,
The New York Times Co. (NYSE:
sought to dampen the fun. The venerable media company announced
print advertising revenue has suddenly slumped anew. As a result,
the company projects ad revenue in the third quarter ending Sept.
30 to total $258 million, 10% below prior-year levels. This is
sobering news for an industry that was just starting to put the
brutal slowdown of 2008 and 2009 behind it.
Analysts have been slow to react, but expect them to lower their
forecasts and target prices for many major media companies. The
good news is TV and Internet ad spending is likely to hold up
reasonably well in 2012, since marketing spending is likely to
become more tightly focused on these mediums. Indeed, major
broadcast firms aren't so dependent on ad revenue anymore.
Time Warner (NYSE:
, for instance, each only derive about 20% of their sales from
Yet you should be greatly concerned about two media niches:
newspaper publishing and billboards, which fared quite poorly in
2008 and 2009, and are setting up for yet another deep slowdown.
You should avoid the temptation to buy these stocks, even if they
look cheap. In fact, you may even want to short them. Here's why...
Don't short The New York Times Co.
Shares of The New York Times Co. have been down 20% since Sept. 15
and now trade at about $6. It's still not clear, however, whether
investors have a compelling case to short the stock at this point.
Sure, the print side of the business continues to shrink and early
positive results on the digital subscription
may not be sustained, but there are a couple of steps management
can take to defend
. First, managers can look to cut newsroom costs even further. The
company is one of the few publishers still paying top-dollar for
its key journalists. Finding another 10% to 20% of payroll to trim
wouldn't be too hard without imperiling the company's impressive
breadth and depth of coverage. Looking ahead, management is likely
to be more concerned with preserving
, rather than set itself up for a fresh cash crisis. Even if ad
sales slumped further, the "newspaper of record" is still likely to
generate $300 million in
this year, and will probably push to maintain this level in
At current prices, you can also bet an exclusive set of global
billionaires are salivating over the fact the company's
cap is now below $1 billion. This is just a fraction of the $5
billion Rupert Murdoch's
News Corp. (NYSE:
paid for Dow Jones, publisher of
The Wall Street Journal
, in 2007. This means shares could find support as
rumors periodically emerge.
Short this stock instead
Yet other newspaper stocks are awfully more vulnerable to an
economic slowdown, starting with
. With 75% of its revenue exposed to advertising, Gannett could see
sales slump 10% or more in 2012 if national advertisers decide to
throttle back on ad spending. Sales fell 9% in 2008 and another 17%
in 2009, before a modest 1% drop in 2010. Through it all, Gannett
has generated impressive $1.8 billion in
free cash flow
during the past three years, thanks to deep cost cuts. But now it's
unclear where else Gannett can cut at this point.
The greatest challenge for Gannett is that its flagship newspaper,
, is becoming the third horse in a three-horse race.
The Wall Street Journal
, which belongs to News Corp., and
The New York Times
have also been fighting for the title of the nation's leading daily
newspaper. And it's becoming increasingly clear that USA Today is
losing the race. Its circulation declines have been greater than
the other two for each of the past four years. This trend may
continue into 2012, as advertisers focus on the Times' and
Journal's better demographics.
Analysts currently expect Gannett to post flat sales in 2011 and
2012, and a modest 10% drop in net profits this year in comparison
with last year's $588 million. Yet the headwinds are building and,
if recent history is any guide, then these forecasts may need to
come down by a considerable amount to reflect the incipient
Two more media stocks to short
Two other media stocks may increasingly be in the sights of
short-sellers. Lamar Advertising (Nasdaq:
) is the third-largest outdoor advertising company in the United
States -- behind
Clear Channel Outdoor Holdings (NYSE:
-- with 160,000 advertising displays in 44 states. Analysts expect
Lamar's sales to be flat in 2011 and 2012, though it's worth noting
sales fell 11% in 2009 from the year before, as a result of the
economic slowdown. Lamar's primary focus is on local advertisers,
and this group grew especially cautious after the last downturn. As
is the case with Gannett, shares are vulnerable to a steady
drumbeat of downward earnings revisions.
Lastly, of all of the broadcasting-focused media companies,
Scripps Networks (NYSE:
has the greatest exposure to ad revenue, at 68%. Analysts at
Goldman Sachs figure every 1% drop in ad revenue equates to a $0.05
earnings per share (
drop in 2012. Analysts are modeling for a 6% jump in sales next
year, but how realistic is this? Simply cutting the 2012 sales
forecast growth rate from 6% to 0% would lead
to be cut from a current consensus estimate of $3.27 to $3. And
this assessment may be too optimistic. Scripps earned just $0.14 a
share in 2008 and $1.65 in 2009. At a recent $40, shares may need
to fall about 25% to less than $30 to reflect the new sobering
outlook for advertising.
Risks to Consider:
The downward move into arecession is still no sure thing. If
theeconomy stays afloat, then the recent ad revenue drop The New
York Times Co. revealed at the Communacopia Conference may simply
be a blip rather than a trend.
Action to Take -- >
This industry suffered "death by a thousand cuts" in 2008 and 2009,
as analysts steadily ratcheted their outlooks downward. So it's
best to avoid the advertising sector this time around. In some
instances, it would be wise to establish short positions, such as
in the three stocks I mention above, since growth estimates remain
far too optimistic in light of the nascent economic slowdown.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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