Gannett Co.'s (NYSE:GCI) debt was downgraded to junk status by Standard & Poor's due to declining prospects in the newspaper publishing business. The S&P rating on Gannett's corporate debt was lowered from BBB to BB, while its senior unsecured debt was lowered to B-plus. This came on the heels of Gannett's disappointing year-end and fourth-quarter results, released at the end of January.

IN PICTURES: 7 Tips On Buying A Home In A Down Market

Paper Profits

While the newspaper business has been under assault from falling advertising and lowered subscriber revenue, the rise of the internet and the sick economy have also taken their toll on the industry. Gannett is the nation's largest newspaper publisher. The once-inspired - or derided - concept of USA Today, the nation's newspaper published by Gannett, is falling prey to permanent changes in both reading and publishing habits. Some major dailies have folded while others are in trouble.

Gannett's Report

Gannett's year-end earnings report for 2008 showed a non-cash impairment charge that took earnings per share down to a $7.81 loss. Absent this and severance charges, the year's EPS would have been $3.61. For the fourth quarter, the company earned 69 cents per share versus $1.06 in Q4 2007. Adding back the severance pay charges, the EPS would have been 85 cents. Overall operating revenue for the year declined from $7.4 billion in 2007 to $6.8 billion in 2008. The company cut the dividend by 90%, which should save an estimated $325 million in cash. So why the S&P downgrade? (Are you in danger of losing your dividend? Read Is Your Dividend At Risk? to learn about telling factors that can help you answer this question and avoid losses.)

Headlines Bleak On Gannett's, Other Papers' Prospects
What troubles investors and what brought the downgrade from S&P were likely factors such as the 36% falloff in ad revenue, and the deep malaise that has infected the publishing industry. Gannett's own views are that the industry will be in for a tough year in 2009. Other major newspaper publishers, such as the New York Times (NYSE:NYT), which is regarded as the pure newspaper publishing play, are finding this battle equally difficult. Although NYT has been able to stave off some of its worst effects, it still had a negative earnings quarter. The Washington Post (NYSE:WPO), on the other hand, has remained profitable but profits are starting to slip. The Post, like most of the newspaper companies, has other things - TV stations and the internet - yet the paper remains the main vehicle. The Post itself, though, isn't pushing the top line or profits up as the other divisions are. These two giants are often looked to as the leaders in the field, so any slippage in income and revenues here often indicates much worse for the lesser companies.

Concern But No Lifeline
Another factor, which goes far beyond the S&P downgrade, is that the effects of the most significant changes in the newspaper industry are not going to be reversed. Sure, the fortunes of one company or paper can be improved, and just about every industry is having stories written about it featuring bleak news, but it's different for newspaper publishing. Those major dailies that die will not be replaced, at least not by newspapers like them or likely by papers at all. A combination of the internet and perhaps morphed video-mobile sources instead will rush into the vacuum. This is not so much the future as now.

When you look beyond the Post, the Times and Gannett, which are taking hit after hit to both their top and bottom lines, and see what were traditionally solid, profitable companies - such as E.W. Scripps (NYSE:SSP), which has recorded a string of losses, and McClatchy (NYSE:MNI), whose income has flattened - you have something more than a trend. Both Scripps and McClatchy were long-standing, profitable, traditional newspaper groups.

A Change Of Fortune
At one time, publishing was an industry for wealthy entrepreneurs who might have had interests other than pure profitability in mind. Think "Citizen Kane" in movies, Hearst in, well, real life, and many of the other dynamic figures who drove the massive engine of the print world. Influence, prestige and social responsibility either went along with profitability or went ahead, tolerating losses. These seem quaint notions with no place in today's world. Certainly they aren't finding much of a place in the newspaper publishing business; it's too costly.

Gannett has, in its own way, been as much an idea as a company despite derision from the upper crust of the Times, the Post and whoever else held their noses in the air at "McPaper", the early scornful name given to the USA Today. And Gannett will face an uphill run in the future, but it's in good company.

Bottom Line
With Gannett's stock price off a 1929-like 90.8% - trading at $2.92 a share, down from $31.86 - the market senses blood. Whether newspapers can remain vital or just linger, perhaps survive, or whether they become fondly remembered anachronisms, are the notions built into that stock price.

To learn more about debt with junk status, be sure to read Junk Bonds: Everything You Need To Know.

Related Articles
  1. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  2. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  3. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  4. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  5. Investing News

    The 10 Fastest Growing Green Startups in 2016

    These social entrepreneurs adopt triple bottom lines that champion urgent environmental problems while generating returns for shareholders.
  6. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  7. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  8. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  9. Retirement

    Roth IRAs Tutorial

    This comprehensive guide goes through what a Roth IRA is and how to set one up, contribute to it and withdraw from it.
  10. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center