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Media General results no cause for optimism

|Includes: Media General (MEG)

Shares of media concern Media General, Inc. (NYSE: MEG, $4.68, 22.83M shares) doubled today on reported earnings of $20.6M. Lee Enterprises (NYSE: LEE, $1.06, 44.92M shares), Gannett Co, Inc. (NYSE: GCI, $5.21, 232.44M shares), and The McClatchy Company (NYSE: MNI, $1.10, 83.65M shares) rose between 5% and 54% on the news.

According to Reuters:

Right in line with the past week’s earnings results from McClatchy (NYSE: MNI) Company and Gannett (NYSE: GCI), newspaper publisher Media General’s aggressive cost-cutting helped it swing to profit in Q2. And while ad spending continued to fall, especially in classifieds, the Richmond, VA.-based owner of The Tampa Tribune, Richmond Times-Dispatch and 20 dailies, indicated that the declines have started to abate, particularly in auto ads. Retail is also showing some signs of having hit bottom.

Newspaper publishers’ digital businesses have generally been one area that has shown growth and Media General (NYSE: MEG) said that in Q2 the interactive media segment was able to benefit from revenue gains tied to its online coupon and shopping site In addition, local ad revenues were up 18 percent.

However, one-time tax benefits produced $11.1M of gains. The sale of a Jacksonville, FL CW station generated another $7.1M. Of the $20.6M originally stated, only $3.8M came from sustainable operations, excluding severance expenses of $1.4M.

The company's segment breakdown revealed continuing stress:

Publishing - 20.3% revenue decline matched against 24.8% expense decline. The expense reduction excluded severance and 'special charges' and benefited, to an unspecified extent, from a freeze of pension matching. In Q1, MEG underfunded its pension by $252M.

Broadcast - 21.4% revenue decline compared to a 19.6% expense decline.

Interactive - 5.7% revenue decline despite a 24% increase in revenue. Operating losses increased 68% to $1.1M.

Given the uncertain future of the American economy, and of the ad market in particular, MEG should only be viewed as a highly speculative play. In addition to relying upon printed media for over 40% of sales, the Tampa, Florida segment of the business, once significant, has dwindled to nothing. The company also owes $711M in term loans that mature in 2010 and 2011. The pension fund remains significantly underfunded despite a stock market rally since March 31, when the obligation stood at $252M. Purchase obligations numbered over $190M last year; even assuming massive reductions in print production and decreases in broadcast relicensing fees, purchase obligations impose a large off-balance sheet liability.

MEG does not have the owner's earnings or asset value to provide a margin of safety. In light of the serious issues regarding capital structure, business model, and macroeconomic sensitivity, this company is a pass.