Dear newspapers: Happy holidays. Love, Wall Street.

The stocks of Gannett Co Inc and New York Times Co, two of the best-known U.S. newspaper publishers, rose on Wednesday after an influential media analyst raised his ratings and profit forecasts on the companies.

After years of downward revenue estimate revisions, it appears as though the newspaper ad market is improving more quickly than we previously anticipated, Wells Fargo analyst John Janedis wrote in a research note for his clients.

Gannett shares rose 78 cents, or 5.4 percent, to $15.19 in early trading on the New York Stock Exchange. New York Times shares rose 68 cents, or 6.2 percent, to $11.71 on the NYSE.

The gains cap a year that made even some of the most stalwart newspaper investors queasy. Gannett traded as low as $1.86 in March, while the Times skidded to $3.44.

Those lows would have been rays of light for peers like McClatchy Co , whose shares hit a low of 35 cents last March and rose 2.0 percent to $3.62 on Wednesday. Many publishers saw their stock values vaporize because of the recession, frozen debt markets and an increasing sense that newspapers are a dying business.

At the same time, many media experts, debt analysts and bloggers who write about how much they hate dying, biased newspapers wrote that the Times and Gannett both were wobbling on their debt and potentially faced default or insolvency.

Since then, newspaper stocks have risen as publishers including Rupert Murdoch's News Corp have said that severe ad revenue declines were easing.

Gannett has risen 716 percent since its 12-month low, while The New York Times has risen 240 percent. The Dow Jones Industrial Average <.DJI>, by contrast, has risen 62 percent.

FUNDAMENTAL PROBLEMS

Janedis' note does not mean that the newspaper business is recovering. The fundamental problem remains: Newspaper publishers have not found a way to sustain their businesses with a primarily Internet-based product. Printed papers still make most of the money, and that business is still falling.

Gannett and the Times, like other publishers, are finding some of their improving profits in cost-cuts rather than better ad sales. Those cuts come in part from layoffs and furloughs.

The Times, for example, laid off more than a dozen well-known newspaper reporters this month after offering buyouts to 100 members of its newsroom staff. Gannett has laid off thousands of employees in recent years.

The newspaper stock recovery, as a result, is one that will benefit investors in the short term and does not necessarily indicate confidence in publishers' long-term futures.

As Janedis wrote, improvement means ad revenue declines in the high single digits as opposed to 30 percent ad sales declines from one year to the next.

Janedis upgraded Gannett to outperform from underperform and upgraded the Times to market perform from underperform.

He raised Gannett's fourth-quarter 2009 profit forecast to 69 cents a share from 61 cents and its 2010 annual profit forecast to $1.95 from $1.55. He raised the Times' fourth-quarter profit forecast to 43 cents a share from 42 cents and his 2010 forecast to 67 cents a share from 61 cents.

(Reporting by Robert MacMillan, editing by Gerald E. McCormick.)

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