McClatchy stock: Is it hot air?

McClatchy's stock price is down 31% since close of the Knight Ridder deal. An article by Jonathan Weil on Bloomberg.com says the market has rendered an early verdict on the Knight Ridder deal, but McClatchy's financial statements don't reflect it. As of April 1, McClatchy showed $3.59 billion of the intangible asset known as goodwill -- more than its shareholder equity of $3.15 billion and more than its current market capitalization of $2.2 billion.

Under the headline, These Newspaper Assets Don't Look Fit to Print, Weil writes:

Memo to executives at McClatchy Co., the newspaper chain that uses ``Truth to Power'' as its slogan: The stock market thinks your company's balance sheet belongs on the funny pages.

While Rupert Murdoch is offering crazy money for Dow Jones & Co. to get his mitts on the Wall Street Journal (where I once worked), it's a much different story for publishers of metropolitan monopoly newspapers that lack global brands, such as McClatchy, Lee Enterprises Inc. and Journal Register Co.

Either these companies are the biggest stock-market bargains the industry has seen in years, or many of the assets on their balance sheets aren't worth diddly. Meanwhile, write- offs in the hundreds of millions of dollars are beginning to look inevitable, barring a quick turnaround in the companies' stock prices or a sudden shift by advertisers from the Internet back to fish wrap.

Barely a year after Sacramento, California-based McClatchy paid $4.6 billion for Knight-Ridder Inc. and sold the parts it didn't want, the publisher of the Sacramento Bee and Kansas City Star now has a stock price that's 31 percent lower than it was the day the acquisition closed. While the market has rendered an early verdict on the Knight-Ridder deal, McClatchy's financial statements don't reflect it.

As of April 1, McClatchy showed $3.59 billion of the intangible asset known as goodwill, which companies put on their balance sheets when they buy other companies at premium prices. That was more than its shareholder equity of $3.15 billion and more than its current market capitalization of $2.2 billion. So, to believe the company's balance sheet, McClatchy's goodwill alone is worth more than the stock-market value for the entire company. To borrow a line from Miami Herald columnist Dave Barry, who now gets his paycheck from McClatchy, I'm not making this up.

Air for Sale

There's just one nagging problem: You can't sell goodwill by itself. Technically goodwill is the asset that companies record on their books to reflect the difference between the price they paid to buy another company and the fair value of the acquired company's net assets. More broadly, in lay terms, goodwill is synonymous with thin air.

It's no surprise that investors have concluded McClatchy's assets aren't worth nearly as much today as they once cost. McClatchy's revenue declined in each of the past two quarters, and newspapers have done an excellent job of chronicling their industry's troubles. For now, though, McClatchy spokeswoman Elaine Lintecum says it's premature to conclude that write-offs are coming.