Before the dawn of the information superhighway, the common morning ritual began with a newspaper in hand and a hot cup of Joe. Joe is still alive and kicking, but with increasingly hectic schedules and advances in technology, some hands have switched to holding a mouse instead of a paper.
The newspaper industry has been running out of ink lately. Big companies such as Gannett (NYSE:GCI) and Knight Ridder (NYSE:KRI) reported recently that decreasing ad sales and higher newsprint costs would diminish third-quarter revenues. This led some to believe that the industry is dead money, and the negative guidance has prompted the naysayers, driving the sector even lower.
A midyear report by the Newspaper Association of America (NAA) suggested that while ad spending for recruitment and online newspapers was strong, ad spending for national and local auto dealers was horrible. Can the industry recover?
The answer could very well come from the tattered auto industry. While it's true that local auto dealers have been reluctant to throw money into advertising, given the manufacturers' eye-catching incentive programs, the NAA thinks this strategy is not sustainable. And it makes good sense that once the auto industry halts incentive programs, local ad spending should rebound.
Or will the answer come from national advertising, composed mainly of travel, telecom, and motion pictures? In general, national ad spending is expected to pull out a second-half recovery. If high fuel costs subside, travel advertising may pick back up, and with a slew of new movie releases, entertainment ad spending may boost revenues.
With sector valuations already depressed, which company is best positioned to ride out the storm? Although the New York Times (NYSE:NYT), which reported job cuts yesterday, and Tribune (NYSE:TRB) look attractive, Knight Ridder makes my A list. Knight Ridder's aggressive share repurchase and gorgeous dividend may soothe investors in a time when bottom-line expenses are shredding revenues. In addition, a growing commitment to online ventures such as Real Cities, the largest national network of city and regional Web sites, may help boost top-end growth.
In my opinion, it's still too early to type a success story for the industry. But with the storm in full rage, Knight Ridder's ship may be able to take a beating better than most.
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Fool contributor M.D. Mitchell is down the street at the local junkyard looking for some good trash. He believes paper always beats rock but doubts paper beats mouse. He owns none of the above companies.
