Prudential Upgrades McClatchy

By: Jennifer Saba

Prudential Equity Research is confident about McClatchy now that the company has agreements in place to sell 12 former Knight Ridder papers. As a result of the transactions, the research firm raised its rating on the company from “underweight” to “neutral.”

Analyst Steven Barlow likes the multiple — 9.3 times 2005EBITDA — that McClatchy fetched for the 12 papers, especially given the fact that “these were the runts of the liter,” as Barlow puts it. “This was a better outcome then we originally anticipated despite the fact that this is a pre-tax multiple.”

Barlow wrote in a note released on Thursday, that McClatchy beat Prudential’s earning per share estimate by $0.04 (the company reported Q2 EPS of $0.94).

McClatchy managed to pull out the stops because of cost controls — the company’s revenue growth of 0.5% fell below Prudential’s estimate of 1.1%. Minneapolis, the company’s largest paper that accounts for 30% of consolidated revenue, suffered in Q2. The paper’s total revenue fell 4.9% while ad revenue slipped 4.7%.

McClatchy’s California properties, the largest region for the company representing 39% of revenue, reported gains in revenue, up 5% and in ad revenue, up 6.5%.

There are risks to Prudential’s call including slower than anticipated revenue growth and the any potential issue that may crop up with the integration of Knight Ridder properties.

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