Why I'm Passing on The McClatchy Company

Less than 6.5x EV/EBITDA. Now that sounds interesting! This how I started my work yesterday on The McClatchy Company (MNI), a $1.6B newspaper company that is most famous for buying Knight-Ridder and selling off some of the newspapers. McClatchy owns a bunch of regional newspapers from the Fresno Bee, to the Wichita Eagle to the Miami Herald. My few hours of work came up with a list of good news and bad news:

Good News:

Local papers have a steady audience and may be the best way for advertisers to access local markets. This positioning appears to be quite defensible and enduring.

Recent partnership with Yahoo! will enable MNI to further monetize online and print adspace.

Online advertising is growing and will continue to grow.

Recent downturns in Auto & Real Estate ad spending is cyclical (more than structural) and will at some point rebound.

Low valuation.

Poor investor sentiment toward space.

Management is intending to use all free cash flow from operations ($150-200MM/year) to reduce debt incurred in Knight-Ridder deal (over $2B)

Cost cutting is central to ongoing business to preserve margins.

No one appears too interested in starting competing newspapers.

Bad News:

Print advertising is in a structural decline. Who knows for how much longer.

Circulation also appears to be in a structural decline. Who knows for how much longer.

Job advertising is moving online and appears unlikely to come back meaningfully

National advertisers are moving more advertising online. This appears structural, too!

The next generation doesn't appear to be too interested in reading the paper.

Now, there will be a time when the good news begins to outweigh the bad, where online ad sales begin to counterbalance the losses in print ads and some of the cyclical auto/real estate ad spending returns. But, you're guess is as good as mine as to when that happens. Since I'd need a reasoned opinion on when that might happen to think about investing in MNI, I'm going to pass. I like to think of investing as the Home Run Derby. You don't need to swing at every pitch. No one is calling balls and strikes. Take your time. Find a good pitch and try to get some good wood on it.

MNI 1-yr chart:

Disclosure: none.