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NY Times Downgraded to Neutral

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The economy, which is still making its way out of the woods, has been taking its toll on publishing companies, and The New York Times Company (NYT) is no exception. However, the companies are contemplating over new revenue generating avenues. We recently downgraded our recommendation on the stock to Neutral with a price target of $10.00.

Advertising - an Inherent Risk

Advertising, which remains a significant source of revenue for the company, in turn depends upon the global financial health.

The ongoing slouch in the advertising market continues to weigh upon The New York Times Company, the publisher of The New York Times, the International Herald Tribune, The Boston Globe and 15 other daily newspapers. Total advertising revenue slid by 6.8% to $244.3 million in the second quarter of 2012, as against a fall of 8.1% registered in the first quarter.

Advertising revenue at the News Media Group fell 6.6% during the second quarter of 2012, indicating declines of 6% in April, 1% in May and 13% in June. Print advertising dipped 8%, following a decline of 7.2% witnessed in the first quarter of 2012. Digital advertising revenue for New York Times Digital business waned 4% during the second quarter.

Tough macroeconomic conditions along with softness in advertising demand impacted the results. Advertisers are shying away from making any upfront commitments in an economy that is showing an uneven recovery. Management hinted at improving advertising revenue trends in the third quarter of 2012 compared with the second quarter on the back of enhanced digital advertising performance.

Another diversified media conglomerate, Gannett Company Inc. (GCI), publisher of the nation's largest-selling daily newspaper, USA Today, hinted at a tepid recovery in the economy along with weakness in advertising demand in the U.S. and U.K. We observe that publishing advertising revenue during the second quarter of 2012 fell 8.1% to $594.3 million from the year-ago quarter, following a decline of 8.4% in the first quarter.

Diversifying Business Model

The New York Times Company has been adding diverse revenue streams, which include a circulation pricing model and a pay-and-read model for NYTimes.com and BostonGlobe.com, to make it less susceptible to the economic conditions. The company is also adapting to the changing face of the multiplatform media universe, which currently includes mobile, social media networks and reader application products in its portfolio.

Despite hiccups in the economy, what still guarantees revenue generation is The New York Times Company’s pricing system for NYTimes.com, which was launched on March 28, 2011. The company notified that the number of paid digital subscribers for The Times and the International Herald Tribune reached 509,000 at the end of the quarter, reflecting a jump of about 12% since March 18, 2012.

The company also launched a pay and read model for BostonGlobe.com for a weekly subscription of $3.99. The number of paid digital subscribers reached 23,000 at the end of the quarter, representing an increase of 28% since March 18, 2012.         

The increase in the subscriber base was due to the company’s decision to limit the number of free articles that can be read by online traffic visiting the website of its flagship newspaper. Online visitors cannot access more than 10 free articles per month, which is exactly half of what the pay-and-read model offered when the system was launched.

The publishing industry has long been grappling with sinking advertising revenue. This comes in the wake of a longer-term secular decline as more readers choose free online news, thereby making the print-advertising model increasingly irrelevant. To curb shrinking advertising revenue and seek new revenue avenues, the publishing companies contemplated charging readers for online content.

Other Initiatives

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, and in turn the operating performance.

The company is also offloading assets that bear no direct relation to the core operations. The New York Times Company recently divested its remaining stake (210 Class B units) in the Fenway Sports Group, the owner of the Boston Red Sox and the Liverpool Football Club, for $63 million.

Another example of asset shedding by the company is the sale of Regional Media Group, which has been grappling with shrinking advertising revenue.

Waning print advertising revenue, in an uncertain economy, compelled The New York Times Company to take this tough decision of divesting Regional Media Group, part of The New York Times Media Group. This would allow the company to re-focus on its core newspapers and pay more attention to its online activities. The decision to divest is also considered part of the cost containment efforts undertaken to stay afloat in this turbulent environment.

Holds Zacks #3 Rank

The New York Times Company remains committed to streamline its cost structure, strengthen its balance sheet, and rebalance its portfolio. However, we remain apprehensive about the risks the company faces due to its high dependence on advertising revenues. Currently, the company holds a Zacks #3 Rank that translates into a short-term Hold rating.

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