According to a new report, Bear Stearns suggests that newspaper holding companies in Florida and California will likely see ad revenue weakened as the real estate market declines.

"Already struggling with the secular challenges of declining circulation and shifts in ad spending away from print, the cyclical hit of the weak housing market and the ripple effect we believe will occur into retail should continue to weigh on earnings into the first half of 2008," wrote Alexia Quadrani, a Bear Stearns analyst.

Quadrani notes that year-to-date through August, newspaper ad revenue is decreasing 7 percent. Third quarter to date, ad revenue declined 7.8 percent. Classified advertising dropped 14.8 percent in the first half this year, Editor & Publisher reported.

Retail is one of the most vulnerable categories, due to the fact that consumers will probably spend less. Florida, according to Bear Stearns, will face these recessions more seriously. Retail sales are expected to drop in the third quarter and, as a result, retailers will cut back dramatically on advertising.

In the Bear Stearns coverage area, Tribune and E.W. Scripps have the most exposure to Florida and California in terms of revenue at 37 percent and 14 percent, respectively.

Quadrani said she is less concerned about Scripps, because most of its revenue and profit comes from other holdings, which can make up the decline of newspaper ad revenue.

Gannett and The New York Times Co. also have exposure in those markets, at an estimated 7 percent and 9 percent respectively. The New York Times, unlike Gannett, in Bear Stearns view, does not have the TV stations to offset any revenue losses. Moreover, the New York Times does not have as much room to work with its margin as does Gannett.

Bear Stearns maintains its "underweight" rating on the newspaper sector, while Scripps and Gannett are still rated "outperform."