TPS Trade Alert – August 11, 2015
Recommendation:
Buy THE MCCLATCHY CO. (NYSE: $MNI) up to $1.10 per share.
The Opportunity:
It’s not often we find a penny stock that’s been around since 1860, and it’s not often we find a company that’s been in business 155 years looking to tie its future to the internet.
McClatchy Company owns 29 daily newspapers. It also owns websites, mobile apps, direct marketing services, and community newspapers.
Newspapers include the Miami Herald, The Kansas City Star, The Sacramento Bee, The Charlotte Observer, The (Raleigh) News and Observer, and the (Fort Worth) Star-Telegram.
McClatchy also owns 15.0% of CareerBuilder.com and 33.3% of HomeFinder.com.
The problem… newspapers are expensive to run. They always have been. And big advertisers continue to spend less as print readership shrinks.
The opportunity… mobile ad revenues.
Trade Rationale:
The mobile ad market is growing dramatically. According to eMarketer, they will grow to $101.37 billion in 2016, up 430% from 2013.
More than half the people who consume McClatchy’s digital content do it on a mobile device. Mobile user growth was up by 17.4% in Q2.
McClatchy needs to keep cutting expenses. It’s been doing a good job.
It also needs to make sure its salespeople know how to sell digital advertising. This clearly hasn’t happened as quickly as it should have, otherwise the company wouldn’t be in such tough shape.
A year ago, the stock traded at $5.27. Today it’s at $.96.
What we’ve seen over the past year isn’t a sudden fall from grace. It’s been the latest chapter in a long, downhill slide. You’ll see this in the chart… in 2006, this was a $40 stock.
So the question is, “Has McClatchy hit bottom?”
Clearly, the glory days aren’t coming back. But even if this battered stock can claw its way into the $2.30-$2.60 range, less than half of where it was a year ago, investors will do well.
Is this groundless wishing and hoping? We don’t believe so. We believe the cost-cutting, the paying down of debt (by $41 million in Q2), and the focus on mobile ad revenues can pull McClatchy out of its tailspin.
We like what we’re seeing from the management team.
It is fighting to keep its financial house in order. For the trailing 12 months through June 2015, free cash flow is $70.8 million.
For all of its problems, McClatchy does two things better than its peers. Its gross profit margin is stronger than the industry average, and so is its return on assets.
Book value per share is estimated at $5.85 (by Columbine Capital).
When Q2 earnings were reported in July, McClatchy surprised analysts, who were expecting a loss. Net income came in at $98,000, or $0.00 per share, beating estimates by two analysts for a loss of $0.03 per share.
But what a plunge from last year’s Q2 when the company reported net income of $90 million, or $1.06 per share.
Investment Risks:
The big risk is that the turnaround never happens. This is clearly significant because the company has been heading south for more than a decade.
The shift McClatchy is making to try and sell more digital advertising, specifically mobile advertising, is a smart strategy. But competition is fierce.
One risk we do NOT see… running out of money before digital revenues start to grow.
Potential Return:
200% or more.
In the spring of 2014, MNI was trading at just over $5.
We believe McClatchy can trade at $2.50-$3.00 within the next 12 months.
Key Facts:
Company: The McClatchy Company
Ticker: MNI
Recent Price: $0.96
Buy Up To Price: $1.10
Market Cap: $86.38 million
Avg. Daily Volume (3 month): 567,047 shares
Chart:
Category: TPS Trade Alert
