We recently initiated our coverage on The New York Times Company (NYT) with a Neutral rating and a target price of $11.00. The diversified media company's portfolio includes newspapers, Internet businesses and investments in paper mills and other ventures.
The New York Times Company and other publishing companies such as The Washington Post Company (WPO), Gannett Co. Inc. (GCI), The McClatchy Company (MNI) and The E. W. Scripps Company (SSP) have long been grappling with the slump in print advertising demand, with advertisers migrating to the Internet driven by increasing online readership and lower ad prices.
Furthermore, the recent economic downturn has adversely affected the level of national, retail and classified advertising revenues, as advertisers have cut their budget in response to weak economic conditions.
However, with the improvement in the economic environment, murmurs about advertisers returning to the market are getting stronger. The New York Times Company hinted that positive trends are being witnessed in both print and digital advertising with advertisers’ spending gaining pace.
Consequently, The New York Times Company notified that total advertising revenue dropped 6.1% to $312.7 million in the first quarter of 2010, against a drop of 14.7% in the fourth quarter of 2009.
In an effort to offset the declining revenue and shrinking market share, publishers are scrambling to slash costs. The New York Times Company has been realigning its cost structure, and streamlining its operations to increase efficiencies, which have contributed to an improved operating performance.
The significant potential risk is the company’s high dependence on advertising revenue, which in turn depends upon the health of the economy. To mitigate this, The New York Times Company is adding diverse revenue streams to hedge against economic cycles.
Newspaper companies have been remodeling and restructuring themselves to better align with the growing need of marketers targeting younger people, affluent households and other demographic groups with multiple Web and print publications. As the economy gradually revives, we believe advertising revenues will gain strength. However, the picture will become clearer as the year progresses.