Benjamin Clark and Jonathon Ritchie submit: Our company-of-the-week this week is McClatchy Company (MNI), a newspaper publisher that owns and publishes 32 newspapers in Minnesota, California, the Carolinas, and the Northwest (Alaska and Washington). As we did last week, we will be reviewing the company using Warren Buffett's approach for the Business & Management Review. We will also use Benjamin Graham's overall philosophies to guide our Financial & Value Review.
Business & Management Review:
1. Is the business simple and understandable?
The newspaper industry is very simple and understandable. Events happen in the world, whether local, national, or international, and must be reported. People are interested in what happens. McClatchy Company and other newspapers focus on reporting that news, and rely on advertising revenues.
2. Does the business have a consistent operating history?
McClatchy Company has been publishing newspapers since 1857. Over the years the company has acquired numerous newspapers, and today is the second-largest newspaper company in the United States, in terms of circulation. The company has never deviated significantly from this operating focus.
3. Does the business have favorable long-term prospects?
The newspaper industry is currently in a state of renewal and change. With the growth of the internet, the need for news delivered daily by paper has diminished. It may seem that newspaper companies have reached the downslide of the business life-cycle. However, the management of McClatchy has done an excellent job of transitioning to the internet-age, having created Nando.net (now McClatchy Interactive) in 1994. Over time, their online presence will likely lead to continued prosperity and growth.
4. Is management rational?
The management of McClatchy is very rational, and open to change--as evidenced by their focus on growing their online presence and acceptance that the future is the internet, and newspapers are the past.
5. Is management candid with its shareholders?
McClatchy Company has an extensive investor relations section on their website, which can be found at http://www.mcclatchy.com/.
6. Does management resist the institutional imperative?
Though most newspaper companies have been following the same approach by moving the bulk of their content online, we believe that this is not evidence that management is following the institutional imperative. Rather, the management is realistic, willing to change, and realizes that they must adopt very similar approaches to their competitors in order to continue to operate and have favorable long-term prospects.
Financial and Value Review:
This company appears to be very stable financially. The company has had a positive net-income for over ten straight years, has paid dividends for over ten years, and has increased their earnings per share by more than one-third over the last ten years. Following Graham's approach, this stock appears suitable for the defensive intelligent investor.
We believe this company is also significantly undervalued. The company has a low P/E ratio and a low price-to-book [P/B] ratio. In addition, the company has a high return on invested capital (calculated by using Buffett's Owner Earnings and Contributed Capital). We believe McClatchy Company has potential to reach $62.54 within the next few years.
Neither of us held a position in McClatchy Company at the time of publication.