Read all about it! Cost-cutting polishes newspaper stocks despite lingering gloom

Newspaper stocks surge as their own news improves

SAN FRANCISCO — Newspapers may have finally stopped — or at least slowed — their harrowing descent into a financial abyss after three years of plunging revenues, crumbling stock prices and shrinking staffs.

The latest glimmer of hope came Tuesday when Gannett Co., the largest U.S. newspaper publisher, announced that its third-quarter earnings will be substantially above analysts’ forecasts.

Although Gannett’s revenue for the period, which ended Sunday, fell slightly below analysts’ projections, executives said newspaper advertising sales didn’t fall as badly as they did in the first and second quarters.

That’s not saying much. Gannett’s ad revenue from USA Today and its other print publications dived 33 percent during the first half of the year.

And newspapers have yet to come up with a cure for the perilous problem they faced before the recession even struck — what to do about the massive shift of readers and advertisers to the Internet.

But Gannett’s modest progress suggests newspapers might at least be able to recover some of the revenue lost since 2006. Analysts suspect a rebound could begin soon and accelerate next year, particularly if advertising for homes, cars and jobs picks up.

If that happens, newspaper profits should surge because publishers have lowered their costs dramatically by jettisoning thousands of workers, slashing wages and closing offices. Less advertising also means smaller print editions, reducing the need for newsprint — the industry’s second-highest expense after labor.

Gannett, for instance, has shed nearly 5,500 workers since 2007 and imposed other cost-cutting measures that already appear to be saving more money than people outside the McLean, Va.-based company expected.

That explains why Gannett’s third-quarter profit will be so much higher than analysts estimated even though revenue continued to disappoint, said Ken Doctor, a media analyst with Outsell Inc.

Excluding one-time charges, Gannett said it will earn 39 cents to 42 cents per share when it reports the results Oct. 19. The average analyst estimate on the same basis had been 29 cents per share, according to Thomson Reuters.

Gannett said its revenue for the period will be $1.31 billion or $1.32 billion — below the average analyst target of $1.38 billion and 20 percent less than what Gannett reported at the same time last year.

Investors scrambled to adjust for the profit miscalculation Tuesday as the stocks of Gannett and its industry peers soared. In many cases, investors who had been selling newspaper stocks “short” — betting that the shares would fall even further — were pressured to buy to minimize their losses, said analyst Edward Atorino of the Benchmark Co.

Gannett shares rose $1.76, or 18 percent, to close Tuesday at $11.74. The New York Times Co. climbed 40 cents, or 5 percent, to $8.39; Lee Enterprises Inc. soared 89 cents, or 42 percent, to $3.03; Media General Inc. gained $1.07, or 14 percent, to $8.97; and McClatchy Co. was up 25 cents, or 6 percent, to $2.65.

All those stocks now go for several times what they did in the depths of the recession. In February and March, “newspaper stocks were being priced as if they were all going to go out of business,” Doctor said. Things looked so bleak that Gannett shares plummeted below $2 in early March while McClatchy cratered at 35 cents.

Despite the recent rally, newspaper stocks are 60 percent to 90 percent below where they stood three years ago, before the advertising slide began to siphon away publishers’ main source of revenue. At the end of September 2006, for instance, Gannett traded at $56.83, and McClatchy stood at $42.19.

Since then, newspapers in Seattle, Denver and Tucson, Ariz., have stopped publication, and several publishers have filed for bankruptcy protection. The bellwether Standard & Poor’s 500 index is down only about 20 percent.

The main reason for the huge disparity: Newspaper ad revenue this year is on pace to total about $27 billion, down roughly 45 percent from $49 billion in 2006.

Not all of that revenue is likely to return to newspapers, even if the U.S. economy is finally out of the recession. While the economy exacerbated newspapers’ misery, it’s only part of the problem.

Even before the downturn, readers and advertisers were shifting to the Internet. Newspapers have been trying to sell more online ads, but those efforts have yet to offset the losses because Internet advertising rates are so much lower than print.

Some Web sites like Craigslist don’t even charge for most classified ads, drying up one of newspapers’ biggest sources of cash.

Newspapers are bringing in a little more money by asking their readers to pay more. Some newspapers, like Gannett’s USA Today, are now charging $1 for a weekday edition.

But circulation figures indicate many readers are giving up the print edition rather than accept the price increases — probably because they can read the paper online for free. Some publishers are drawing up plans to charge for parts of their Web sites.

At least it now appears newspaper publishers have more breathing room to figure out their next move — as long as advertising revenue doesn’t drop any further.

Doctor likens newspapers’ past few years to a disastrous earthquake followed by a devastating tornado.

“The earth isn’t shaking as much any more and now it looks like there isn’t another tornado on the horizon,” he said, “so it actually feels pretty good not to have anything cataclysmic in front of you any more.”

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