Newspaper Stocks Still Soggy

The good news is that things can't get much worse for newspaper stocks.

The advertising and earnings pictures keep getting worse, but large-cap newspaper stocks may have bottomed anyway, according to a Merrill Lynch report Wednesday.

Gannett (GCI Quote), Tribune (TRB Quote) and the New York Times(NYT Quote) are all down between 25% and 30% over the last year, while shares in Scripps (SSP Quote) are down 10%.

But "after a comprehensive review of both newspaper stock valuations and our fundamental outlook for the newspaper industry, we believe some of the larger-cap newspaper stocks have bottomed at their current valuations," Merrill says in a report Wednesday. The firm does business with the companies it covers.

The comment comes even as Merrill on Wednesday lowered its industry ad revenue-growth forecast to 1.5%-2% this year and 1.4% next year, from the previously targeted 2% to 3% rise in 2006 and 2007. Accordingly, Merrill has lowered its earnings per share estimates by 2% on average.

Research analyst Lauren Rich Fine says that "Tribune's valuation looks appealing, but as we see no attempt by the company to surface value, we see little catalyst near term." Rich Fine says Gannett suffers from the same symptoms, but notes that the USA Today owner, which holds some regional assets in the U.K., could benefit from signs of a turnaround over there. Where Scripps is concerned, Merrill says it has attracted some value interest, but adds that it remains early to get too aggressive.

A confluence of factors led by the emergence of the Internet as a primary source for news and classified information has cast a pall over the industry. Players have scrambled to build online by buying or partnering up with firms like About.com, Career Builder and Shopzilla.

Some of the companies mentioned are helped by a certain diversification of media assets, most notably Scripps, which has been buoyed by the strength of its cable networks like HGTV and Food and new-media investments. Tribune has come under pressure from some quarters to divest of noncore assets like baseball's Chicago Cubs, but has yet to act on any significant divestiture.

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