Paper Cuts: Deep Enough to Sustain a Recovery?

Investors can suddenly feel a pulse in newspaper companies. But the prognosis remains troubled. Badly beaten-down newspaper stocks have doubled or tripled in recent weeks after surprisingly upbeat earnings for the quarter ended in June. A bull case has emerged: Newspaper managements have cut costs so heavily that as long as advertising stops declining, fewer publishers will print red ink. Any moderate upturn could produce significant profits. Well, maybe. Certainly, costs have been cut. In the latest quarter, for instance, most of the publicly traded publishers reported expense cuts of about 20%, close to the 20% to 25% revenue drops they also experienced. A major area for expense reduction has been employee compensation, which can account for 50% of total costs, estimates John Morton of Morton Research. Savings from layoffs should continue. But those from pay freezes or even cuts will be tougher to maintain. Then there is another area of big expense reduction: newsprint. Together with ink it can account for 15% of expenses, although significantly less in the most recent quarter.