Goldman warns of worse newspaper fate in recession

By Michele Gershberg

NEW YORK, Jan 9 (Reuters) - U.S. newspaper revenue and earnings declines are likely to accelerate in a recession, making the troubled media sector even more vulnerable in 2008, Goldman Sachs said on Wednesday. Newspaper shares fell after Goldman lowered estimates and price targets nearly across the board for publishing companies covered by its analysts, with the New York Times (NYT.N) and McClatchy Co (MNI.N) noted among the least favorites.

While newspapers are already struggling to compensate for advertising that has moved to the Internet, economic woes will serve as a catalyst, Goldman analysts said in a research note.

"We believe this secular trend will be exacerbated by a cyclical downturn in 2008, particularly affecting the classified categories, resulting in what we believe will be the industry's weakest revenue performance since 2001," it said.

New York Times shares fell 4.22 percent to $15.42, McClatchy slid 3.59 percent to $10.47 and Gannett Co Inc (GCI.N) shed 2.75 percent to $32.89.

Goldman said separately it expects the U.S. economy to drop into recession this year, with gross domestic product growth of 0.8 percent for 2008. It sees the Federal Reserve slashing benchmark lending rates to 2.5 percent by the third quarter from the current 4.25 percent.

Within the media and communications sectors, Goldman analysts Anthony Noto, Peter Appert, Jason Armstrong and Mark Wienkes kept a cautious investment view of newspapers and radio, a neutral view on telecoms and cable services and an attractive view on Internet and video games.

"We would avoid those sectors and companies with the most exposure to advertising, deteriorating content or ratings trends, secular audience issues and/or significant competitive factors," the note said.

They forecast newspaper ad revenue would drop nearly 8 percent -- far steeper than an original forecast of a 2.6 percent decline.

Newspapers have already made deep cost cuts by laying off employees and reducing print-page widths, giving them little room for additional cost savings to take pressure off margins.

In the entertainment sector, Goldman forecast a 3 percent to 5 percent decline in traditional U.S. advertising in 2008, and a 5 percent drop for DVD sales.

Satellite radio will likely be hit by weak U.S. auto sales, with Sirius Satellite Radio (SIRI.O) particularly vulnerable, they said. Sirius shares fell more than 7 percent to $2.76 at midday, and XM Satellite Radio Inc XMSR.O shares lost more than 9 percent to $10.38.

The largest telecoms players like AT&T (T.N) and Verizon Communications (VZ.N) will benefit from their sheer size, but Goldman said it took a bearish view on companies relying on fixed-line phone revenue, such as Qwest Communications (Q.N) and Embarq (EQ.N).

Internet companies remain attractive, with consumers likely to hunt for bargains on eBay (EBAY.O) and advertisers expected to bolster paid search spending on Google (GOOG.O) since it has a more proven link to revenue gains, Goldman said.

Finally, the video game sector could yet weather the storm, led by Electronic Arts (ERTS.O), as consumers showed during the last economic downturn in 2001 to 2003, they were still buying games in droves.