New York Times Drops as Lehman Cuts Profit Estimates (Update4)

By Gillian Wee

July 9 (Bloomberg) -- New York Times Co. dropped the most in almost 10 years after Lehman Brothers Holdings Inc. lowered its earnings estimates for the third-largest U.S. newspaper publisher as advertising revenue deteriorates.

The company's dividend is at risk of being cut in coming years, Lehman analyst Craig Huber also said today in a note to clients. The stock is expensive compared with Gannett Co., the largest U.S. newspaper publisher, and McClatchy Co., owner of the Miami Herald, Huber wrote.

Potential asset sales, including the Boston Globe, ``are not a reason to own'' New York Times, Huber said, citing ``by far the worst timing'' in more than 15 years for the company and industry. New York Times settled a proxy fight with Firebrand Partners and Harbinger Capital Partners in March after adding two of the investors' nominees to its board.

``They're in an industry that's in decline and the only thing that will save them is the ability to migrate their business over to the Internet,'' said Richard Dorfman, managing director of investment firm Richard Alan Inc. in New York. ``It's a mad dash to transition to be a profitable and large online provider. Nobody has unlocked the safe to find that formula.''

Morgan Stanley Investment Management tried to force the company to eliminate its dual-class stock structure that gives the Ochs-Sulzberger family control of the board. The investor pressured New York Times for more than a year to do away with super-voting shares before abandoning the effort last October.

Lehman's Huber reduced his estimate for 2008 earnings per share to 75 cents from 85 cents and for 2009 to 65 cents from 78 cents. He also cut his 12-month price target to $8 from $11.

Record Drop

New York Times fell $1.05, or 7 percent, to $14.01 at 4:03 p.m. in New York Stock Exchange composite trading, the biggest decline since October 1998.

Ad revenue at the flagship New York Times likely will drop 9.1 percent this year, more than the 7.2 percent previously projected, Huber said. Ad sales next year probably will fall 7.5 percent, compared with his earlier estimate of 6 percent.

Huber cut his estimates following the newspaper industry's 14 percent drop in print advertising in the first quarter, the worst on record. Advertisers spent $8.43 billion on newspaper ads in the first three months of 2008, according to the Newspaper Association of America, the eighth straight drop. Real estate and recruitment ads each fell 35 percent.

New York Times' sales fell 6.6 percent in May amid declines in national, retail and classified ads, mirroring drops at other U.S. publishers as marketers shift their ad spending to the Internet and cable television. Under pressure from shareholders to boost the stock price, New York Times increased its quarterly dividend by 31 percent in June 2007.

`Internet Acquisitions'

The New York Times is better off in the long-term paying down debt instead of maintaining its yearly dividend, which costs the company $133 million annually, Huber said in his note. The company has about $1.05 billion of debt, wrote Huber, who declined to comment for this story.

``We continue to think the board and management would think long and hard about selling assets and repurchasing shares again until it gets a much better handle on where the fundamentals of the newspaper industry are going,'' Huber wrote. ``The prudent thing to do would be to pay down debt and continue to evaluate the landscape for Internet acquisitions.''

While selling the Boston Globe, 14 small-market daily newspapers, its new headquarters in New York and stake in New England Sports Ventures including the Boston Red Sox might raise $1.5 billion after tax, those sales would hurt the company's 2009 earnings before interest, tax and non-cash expenses by $142.2 million, or 42 percent of the $340 million Huber forecast, he said.

The Times announced 100 job cuts in February, amounting to 7.5 percent of its 1,332 newsroom employees. News Corp. Chairman Rupert Murdoch has taken aim at the paper after buying Dow Jones & Co. in December, by expanding the Wall Street Journal's coverage beyond business to politics and sports.

To contact the reporter on this story: Lisa Wolfson in San Francisco at lwolfson@bloomberg.net

Last Updated: July 9, 2008 16:11 EDT

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