"Stinker of an Industry"

Merrill's newspaper analyst Lauren Rich Fine is well-respected. She's been watching and commenting on newspapers for a long time, and her declining optimism is worth listening to. You could say, she's not exactly bullish (which way is that steer running?) on the trade.

Consider these comments from her latest report. Like this friendly one:

"We still think it is a stinker of an industry, but believe management skill and cash flow reinvestment will prove the distinguishing qualities."

And what about Gary Pruitt and Dean Singleton buying in?

"It almost feels like doubling down."

And what about the margins the publicly traded newspaper companies should expect?

Merrill Lynch revised its 2006, 2007 and five-year growth rate ad revenue forecasts down to 1.2%, 1.1%, and 1.6% from 1.8%, 1.4%, and 2%, respectively. Margins are expected to come under pressure over the next five years sinking to 16% in 2011 from today's average of 20%.

Fine says that there is $9 billion classified hit to the industry over 10 years, given what print newspapers are losing to competitors. It is making up $2 billion of that through the Career Builders, Power Ones and Classified Ventures investments -- leaving a$7 billion to make up. (Not to mention flagging preprints and challenged retail.)

Thus those declining margins.

Dean Singleton runs a private company. His peers at McClatchy, the Washington Post, the New York Times and Dow Jones all run public companies with two classes of stock, providing something of a break on shareholder pressure. What about Gannett, Tribune and Hearst and others? How will they manage to assuage the public markets and somehow make the adjustments they need to make -- very quickly? That's just one of the many questions to which Fine's report gives more urgency.

Expect those gap numbers to start just a few conversations.