By: Jennifer Saba Goldman Sachs re-initiated its coverage of McClatchy stamping the company "neutral" from a previous "not rated."
?While we have high confidence in the McClatchy management team?s execution skills ... we note that the company?s risk profile rises dramatically with the Knight Ridder purchase,? wrote analysts in a note released today.
In the minds of analysts, two things make McClatchy more susceptible since the Knight Ridder acquisition: hefty debt and greater exposure to classified ad revenues.
The note points to other concerns including McClatchy rocketing to the number one ?pure play? newspaper company in the nation, which means it faces even more secular challenges.
Plus, the papers that McClatchy did retain already have a healthy margin. Goldman Sachs estimates the 20 former Knight Ridder newspapers have an average EBITDA margin of about 30%. While impressive, analysts wrote that profitability gains will be challenging.
There are plenty of upsides though. Analysts like the ?increased scale and greater geographic diversity? and as the company pays off its debt over time, it could help earnings per share in the long run.
Goldman Sachs changed its 2006 EPS estimates to $2.89 from $3.31 reflecting dilution from the Knight Ridder transaction. In 2007, Goldman?s EPS estimate declines to $2.84 from $3.51.
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