Still too early to call McClatchy’s recovery
McClatchy’s prospects are looking up – just a year after investors seemed to expect the newspaper publisher to go bust. The company is marketing $875 million of bonds this week. But investors should be cautious. McClatchy’s recent performance will be tough to maintain.
The company has cut its workforce and reduced pension costs. In the fourth quarter of 2009, operating expenses fell a third from the previous year. And digital advertising revenue rose 15 percent compared to 2008, offsetting some declines in print advertising.
The stock recovered from levels that reflected bankruptcy expectations – 40 cents a share in the middle of last year – to $5.51 on Monday. But online ads only make up 16 percent of total ad revenue. So revenue from ads in McClatchy’s newspapers, including the Miami Herald, Sacramento Bee and Fort Worth Star-Telegram, was still a fifth lower in the quarter. The worry is that the company can’t cut costs fast enough to bridge the time it will take to replace print ad revenue with digital sales.
Indeed, assume that digital ad revenue continues its trajectory and an economic rebound helps print advertising so that the overall decline in advertising revenue slows to 10 percent annually. With expenses remaining at current levels, McClatchy’s earnings before interest, tax, depreciation and amortization (EBITDA) could still fall by more than 30 percent by the end of 2011.
In such a scenario, its debt-to-EBITDA ratio would jump to more than eight times from five times now, and interest expenses would absorb over 40 percent of operating income.
True, buyers of the debt on sale this week will be slotting into the top of the capital structure. And McClatchy’s more than $450 million of equity value should give them comfort that they’re not on the front lines of bankruptcy. But their cash will be used to pay out previous senior creditors – not cushion the balance sheet.
The newspaper business is making headway in cutting costs and increasing online revenue. But metropolitan print newspapers are still in decline. Bondholders may well make McClatchy pay up to reflect this not so long-term risk.