Our top Sell recommendation in the Publishing sector is McClatchy Company (NYSE: MNI - News). As expected, McClatchy cut its dividend in September by half. We expect more pain ahead for McClatchy. One-third of MNI's revenues are in the hard-hit California and Florida markets. Circulation revenue is falling for the third consecutive year (-4.9% in 3Q08), while ad revenue sinks disproportionately.
In our view, MNI can't shrink its costs fast enough, posing a risk of tripping bank covenants if the revenue decline should accelerate and thereby raise leverage. Given the continued downward trend in earnings and cash flow, coupled with the company's high debt-load (Debt/TTM EBITDA was 4.7x), we would not be surprised to see company again cut its dividend (now yielding 24.5%).
The pain caused by a simple dividend cut is nothing compared to the bloodletting heading McClatchy's way in a few months.