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No Hope For Newspapers?

By William Patalon III
Managing Editor

The daily newspaper has been as much a part of American life as apple pie, baseball and hot dogs. And, for many years, it was also a staple of American investment portfolios.

Newspaper stocks were once a top-tier holding. As late as the middle 1980s, newspaper-publishing companies still offered consistent growth, fat profit margins and attractive dividend yields. And because publishers had monopolies in each of their markets, they enjoyed a protected profit position in each of their key markets. Indeed, these very factors made newspapers the target of leveraged buyout specialists.

But no longer. In recent years, competition has escalated. First it was cable TV and specialty magazines. Then satellite TV anted up. But it was the Internet that ultimately trumped the newspaper sector's hand, offering a wealth of continually updated news-and-entertainment information – most of it free of charge. And if that wasn't enough of a challenge, the sector has had to deal with a dwindling customer base and changing readership patterns. As newspaper readers aged and even died off, new readers didn't replace them. The reason: America's youth don't read daily newspapers. So the sector has had to deal with the one-two punch of rising competition and a declining customer base.

Spiraling financial problems and plunging stock prices have been the result.

After prices have declined for several years, Wall Street analysts have repeatedly tried to "call the bottom" on newspaper stocks. And each analyst has been wrong.

But Lehman Brothers analyst Craig Huber has taken a different tack: In a report last week, Huber wrote that the industry has yet to hit bottom, meaning there's little hope for a rebound anytime soon; People are not reading newspapers like they used to, advertisers aren't placing ads at the rate most analysts has predicted, and earnings estimates remain way too high.

According to Huber, investors are better off playing it safe than to bet on – and lose money on – a struggling industry, Huber said. In fact, he says that stocks in this sector could lose another 20% over the next 18 months. While Money Morning typically presents investment ideas and opportunities, this is a case where we're trying to save you some money by helping you avoid losses. And while we typically eschew Wall Street research, we will present it in cases where it buttresses an already-held view of ours, or seems to confirm some analysis that we've already done.

Having worked in the newspaper industry for two decades, I am all-too-familiar with the industry's problems. Indeed, although my MBA is in finance, I actually did my thesis on digital newspapers. That was back in 1995. But even then I could clearly see the tough times the industry was headed for if it didn't find a way to profitably integrate the Internet into its business model. It still hasn't done that. And that failure is a big reason the industry is in the predicament that it's in today.

Like Huber, I don't see things changing anytime soon.

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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