Saving Media

NYTIMES

The McClatchy Company’s prospects are looking up, just a year after investors seemed to expect the newspaper publisher to go bust. The company is marketing $875 million of bonds this week. But investors should be cautious. McClatchy’s recent performance will be tough to maintain.

The company has cut its work force and reduced pension costs. In the fourth quarter of 2009, operating expenses fell a third from the period a year earlier. And digital advertising revenue rose 15 percent compared with 2008, offsetting some declines in print advertising.

The stock recovered from levels that reflected bankruptcy expectations — 40 cents a share in the middle of last year — to $5.51 on Monday. But online ads make up only 16 percent of total ad revenue. So revenue from ads in McClatchy’s newspapers, including The Miami Herald, The Sacramento Bee and The Fort Worth Star-Telegram, was still a fifth lower in the quarter. The worry is that the company can’t cut costs fast enough to bridge the time it will take to replace print ad revenue with digital sales.

Assume that digital ad revenue continues its trajectory and an economic rebound helps print advertising so that the overall decline in advertising revenue slows to 10 percent annually. With expenses remaining at current levels, McClatchy’s earnings before interest, tax, depreciation and amortization, or Ebitda, could still fall by more than 30 percent by the end of 2011.

In that case, its debt-to-Ebitda ratio would soar to more than eight to one, from five to one now, and interest expenses would absorb over 40 percent of operating income.