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Small Cap Newspapers Back in Business? Not Quite Yet. - MNI, LEE

|Includes: LEE, Media General (MEG), MNI, NYT

The McClatchy Co. and Lee Enterprises are among today's biggest small cap gainers.

Though most investors still expect the Internet to destroy newspapers, the market still sees some value today in newspaper stocks The McClatchy Co. (MNI) and Lee Enterprises Inc. (LEE). They're among the very top performers today from within the world of small caps. Does the print media industry actually have a future that merits a 25% and 20% gain, respectively? If it does, here's the really coolest part about today's big winner.... both stocks are priced under $5.00.

Just to be fair, the gains from these two small caps are largely being fueled by good news from the New York Times Co. (NYT). The biggest brother in the newspaper business saw profits rise despite further declines in ad sales.

Well, profits were up if you don't read the fine print. Had it not been for a tax benefit and other one-time charges, NYT would have only earned 8 cents rather than 27 cents. The newspaper earned 15 cents in the same quarter a year earlier.

Media General Inc. (MEG) reported a similar story on Wednesday.... Lower revenue, and profits created by drastic cost cuts (cuts that were bigger than the plunge in ad revenues). MEG shares rallied on Wednesday, but were trashed on Thursday despite more good news from NY Times and Gannett, the publisher of USA today.

of which there are plenty - better hope not. For now though, it appears most of them have not year realized the New York Times' success was only a cosmetic one - revenue was down, as were operating profits.
 Certainly investors could make the argument that the small caps in the industry are better suited to weather an economic storm (declining revenue and ad sales) than the large caps. Unfortunately those arguments don't withstand the test of the numbers. McClatchy isn't expected to make a profit this year or next year. There are no projections for Lee Enterprises, but given the grim forecasts for most of these print media stocks, how different can Lee really be?

Just for perspective, classified ad revenue, the core of newspaper revenue, fell nearly 45 percent in the second quarter for Gannett. Job classified sales fell 62 percent. For Media General, classified ad revenue fell 35 percent, while job ad sales fell 63 percent. Real estate ad revenue was down 55 percent.

Assuming McClatchy and Lee Enterprises aren't wild exceptions to the apparent norm, today's big gains pretty much seem unmerited. So, at under $5.00 their stocks aren't undervalued.... they're just plain cheap, for a reason.

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