In the recent conversation with my friend, a value investing guy as well, I recognized the recent shot up in the stock price of hybrid print and digital news advertising company, McClatchy (NYSE:MNI). At the end of November 2011, the stock was only around $1.10 per share, and as of Dec. 9, 2011, it has shot up to $2.36 per share, an advance of 112% within a third of a month.
In the McClatchy operating business, besides the daily newspapers in the metropolitan areas and non-daily newspapers serving small communities, MNI also operates local websites which are complimentary to its newspapers and expand the reach to its audience. MNI’s own newspapers are the Miami Herald, The Sacramento Bee, the Fort Worth Star-Telegram, The Kansas City Star, the Charlotte Observer and the (Raleigh) News & Observer. In addition, MNI also owns a portfolio of premium digital assets including 14.4% of CareerBuilder LLC, (nation’s largest online job site), 25.6% of Classified Ventures LLC (owner of cars.com and apartments.com), and 33.3% of HomeFinder LLC (real estate website Homefinder.com).
The main source of MNI’s revenue is from advertising, taking around 70-80% of total consolidated net revenues, whereas the rest is from circulation revenue. In its annual report, it was written that MNI’s advertising revenues from digital advertising has been growing even in the structural and cyclical changes of the company. It continued to be the industry leader in digital advertising with digital products, taking 18.1% of total advertising in 2010 and 16.2% in 2009. And in the digital advertising revenues in 2010, 45.2% came from the advertisements placed only online, not being tied to the joint print buy. The management believed that this independent revenue source boded well for the company’s future.
The very negative point of McClatchy's business is its financial structure, employing a very high level of leverage. It has only 7.2% of total assets in equity, whereas the long-term debt is already 53.2%, of $1.6 billion. In addition, the levels of goodwill and intangibles are taking the same percentage in the asset component of the company. Even with the small market capitalization of nearly $100 million, after adjusting the debt and the cash, its enterprise value is up to nearly $1.7 billion, quite a high figure.
However, the high level of long-term debt is not due very soon. Below is the breakdown of MNI’s long-term debt:
The majority of long-term portions are due in 2017, especially $875 million 11.5% senior secured notes due in 2017, which already accounted for half of the company’s long-term debt. The notes due in 2011 only have a balance of $18 million, and in 2014 the balance is nearly $160 million. The rest is due in more than 15 years, in the years 2027 and 2029.
So what about the cash-generating ability to cover debt interest? Historically, it has a decent record of cash generation from operating activities and a level of its free cash flow, only in 2006, where it experienced CFO of -$600 million due to the discontinued operations recorded in its 2006 cash flow statements of more than -$800 million. So, if excluding that effect, the cash flow from continuing operations in that year was more than $200 million.
If adjusting the discontinued operations, the CFO average for the last 10 years is around $220 million, making the average FCF around $180 million. If the business keeps generating $220 million in CFO and $180 million in FCF each year in the future, and the management uses the cash wisely to reduce the outstanding debt level, McClatchy would be in pretty good shape and not subject to the solvency issue in the short-term.
In terms of gurus' trades relating to MNI, since 2009, Joel Greenblatt, John Keeley, John Hussman and John Rogers have been involved with this stock.
They had been initiating long positions and reducing gradually, then sold out in the later period of this year. Following the record of GuruFocus.com, Joel Greenblatt has experienced a loss of more than 50% from the time of buying until he sold out his position.
I think this stock would be worth considering, but with a close eye on the operating performance as well as the rise and fall of the stock price. And it is definitely not a stock to buy, then forget about for the long run.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.