2005 Annual Report - Newspaper Economics

Even in a sluggish year, newspaper profits remains strong. Public companies used a good share of cash flow to buy back their own stock, pumping up earnings per share by leaving fewer shares on the market. Add in tight cost controls, and the public companies were able to increase earnings per share by about 8%, twice what ad revenues grew.

The industry was treading water, though, on operating profit margin. The Merrill Lynch analyst Lauren Rich Fine estimated it at 22.9% in 2004, dead even with 2003 and down from 23.8% in 2002. Fine predicts margins will inch up to 23.1% in 2005, but that's still well below the pre-recession peak of 26.6% in 2000.⁷

It was also a bad year for newspaper stocks. They far outperformed the weak market of 2001-2003, reflecting investor preference for "dull" but reliable stocks and a conventional view that newspapers come roaring out of recession. But 2004 didn't provide the expected ad-growth bounce, and both analysts and their investor clients turned more negative on advertising and circulation growth prospects. Tribune Company trailed the market average by nearly 20%. The New York Times Company, Dow Jones, Knight Ridder and Gannett were flat or slightly down for the year. The Washington Post Company, Pulitzer and Scripps were comparatively strong performers, based on the healthy growth of their non-newspaper divisions (such as educational services and lifestyle cable networks).

Fine also compiles data on circulation revenue per paid customer. Those numbers suggest a split in strategy among the companies. Gannett, which prices aggressively and has accepted big circulation losses, realized $157 per paid customer in 2003. At McClatchy, which emphasizes circulation growth and charges low subscription rates to get it, the figure was $113 per customer.⁸ Even though circulation is a secondary revenue source, gaps that wide can have an earnings impact. But McClatchy's healthy profit margins and ad-revenue growth imply that it is more than making up the difference on the ad side what it may be leaving on the table in circulation revenue.

Finally, it is at least likely that disappointing financial performance and soft prospects translate into skimpy spending on the newsroom. Publishers discovering their business isn't as big as they thought or hoped (Dallas, for instance) have decided they cannot afford the current level of news-editorial effort. Tribune, whose stock performance was under particular pressure, led this round of newsroom belt-tightening with particular focus on the Times-Mirror properties it acquired in 1999. Big cuts were announced for Newsday in November, smaller ones at other papers. And with circulation dropping sharply at both the Chicago Tribune and Los Angeles Times, it looked as if they could be in line for cuts in 2005.

In sum, the business picture is a very mixed bag: healthy for now but with troublesome trends in major indicators that ultimately spill over into the resources companies are willing to devote to their news operations.