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McClatchy Company - On the Long Road to Recovery

 Sep 11, 2009 07:45 PM UTC
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Graphic_arrow1 Via Long Investment Ideas from Seeking Alpha:  

We recommend McClatchy Company (MNI) as a speculative recommendation for risk tolerant investors.

McClatchy, an owner of 30 daily newspapers including the Sacramento Bee, Forth Worth Star-Telegram and Miami Herald, has seen its shares crash since 2007 on plummeting circulation, falling ad rates and a heavy debt load resulting from its ill-timed acquisition of Knight Ridder. After peaking in the mid-$70s in 2005, McClatchy shares touched a low of $0.35 in March 2009.

The company has been on the mend, however, aggressively lowering costs and boosting its online presence. In addition, slumping worldwide demand for newsprint has resulted in substantial newsprint cost savings. Its debt squeeze was relieved by a recent exchange offer that pushed out its earliest maturity into 2011. 2Q09 results saw EPS of $0.30 and operating cash flow of $92.4 million despite a 25% drop in revenue.
We believe McClatchy shares offer a tremendous risk/reward proposition to speculative investors. Signs of a bottoming economy, a significantly lowered cost structure, and positive cash flow all bode well for potential near and longer-term upside.
Opportunity
McClatchy is one of many newspapers that fell on hard times due to the rise of the Internet as a medium for news, classifieds and public notices. The current economic downturn only added to industry misery as major media companies including the mighty New York Times (NYT) seek to redefine their operating models. Others, such as the Seattle Post Intelligencer went as far as to cease print production on March 17 of this year.
McClatchy has little time to ponder its future. The $6.5 billion acquisition of Knight Ridder in March 2006 came at the height of the market and forced the company’s hand early in the economic downturn. The acquisition took the company’s conservative balance sheet from $109 million in debt to more than $2.6 billion. McClatchy shares have fallen steadily from $53 the day prior to the acquisition to a lowly $0.35 earlier this year.
This forcing of the company’s hand, however, may be the silver lining to the story. McClatchy has aggressively built its presence online, today accounting for 16.5% of total advertising revenue versus 11.8% in 2Q08. The company has reduced headcount by 30% helping to produce a 29.3% reduction in cash expenses in 2Q09. Industry tailwinds have also helped as a worldwide slump in newsprint demand has reduced newsprint prices by $130 per ton over the past quarter. Each $10 decline in newsprint lowers the company’s expense load by $2 million. Finally, a shrewd subscription price increase at 26 of McClatchy’s 30 newspapers led to 5% gain in circulation revenue despite higher cancellations.
These improvements, combined with an omitted dividend, reduced CapEx, frozen pension plan, and debt exchange offer, have aided McClatchy in putting its financial house in order. In May, the company successfully exchanged varying amounts of existing debentures into cash and a new Senior Note with the earliest maturity now a $166 million debenture due June 2011.
The company surprised analysts with 2Q09 EPS of $0.30, $0.38 ahead of estimates, and operating cash flow of $92.4 million, a margin of 25.3% versus 21.2% in 2Q08. The company was also able to reduce debt by $103.9 million in the quarter reaffirming that it was well within key bank leverage and interest coverage ratios despite speculation to the contrary.
We believe there is additional reason for optimism as an agreement to become part of Yahoo’s (YHOO) new APT Consortium is helping to drive online advertising. The company also possesses the ability to sell assets including a 10-acre parking lot adjacent to the Miami Herald which is currently in escrow for $190 million.
As a result of significantly lowered costs, current profitability, the successful extension of debt maturities, and minor signs of improvement in advertising during June and July of this year, we believe McClatchy shares have the potential for material upside. We believe further improvement in the economy will provide incremental upside as advertisers become more optimistic. We recommend McClatchy shares for speculative investors.
Business
McClatchy was founded during the California Gold Rush in 1857 and today owns 30 daily newspapers as well as 50 non-daily papers. In addition, the company owns 14.4% of Career Builder, the nation’s largest online job site.


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