Metro Dailies Poised for Slow Rebound

CHICAGO Wall Street analyst Paul Ginocchio predicted that big metro newspapers would bounce back—but not until 2012.

But the Deutsche Bank Securities analyst warned that when earnings turn positive again, they would be in margins far below the levels newspapers got used to in the 1990s.

Those high margins should be seen as anomalies, Ginocchio told the Inland Press Association at its annual meeting in Chicago this week. Margins were high mostly as a result of the massive consolidation of metros as the number of two-newspaper cities fell precipitously.

“We never had margins like that before—and they’re not coming back,” he said.

When EBITDA (earnings before interest, taxes, deductions and amortization) does turn positive in 2012 Deutsche Bank estimates, the margins will be at 17.7 percent. EBITDA margins last year were 25 percent by Deutsche Bank’s reckoning, and they will slip to 21 percent this year, 19 percent in 2008, and to 18 percent in 2009 before they stabilize.

For all the talk about Wall Street’s interest in margins, Ginocchio said, analysts and investors actually prefer to see top-line growth rather than higher margins on smaller growth.

Deutsche Bank, he added, is now “less bearish on the fundamentals” of the industry than it was earlier this year. “There are some people who believe in the future of newspapers. I’m one of them,” Ginocchio said.

Before newspapers reach that 2012 “inflection point,” however, there will be plenty of pain ahead. And some permanent changes to the industry business model.

Automotive classified, for instance, is in permanent decline, Ginocchio suggested. The category has been negative for 12 straight quarters, and will continue to be hurt by dealer consolidation and other changes in the auto industry.

However, the huge drop off in real estate that has been so painful to dailies in Florida and California is “90 percent cyclical,” and will come back, he argued.

The recent acceleration in the decline of print advertising can probably be traced directly to the growing penetration of broadband, Ginocchio said. “Clearly, broadband is the killer app, because you just spend more time online,” he said.

Unfortunately for newspapers, people are not spending much time at all on their sites. Users spend an average of just 41 minutes a month on newspaper sites—far below the 6 hours they average on AOL, for instance.

Meanwhile, the “value” of a print newspaper reader—measured by the revenue generated per reader, minus subscriber acquisition costs and other expenses of servicing him—has dropped even more precipitously than ad revenues. Each reader was worth $962 in March 2004. That’s fallen to $500 this year, Ginocchio said.

Looking ahead, newspapers must continue to wring costs out of their operations, and should look hard at outsourcing printing and delivery costs, the analyst said.