When your favorite pick in a troubled sector is scraping bottom, you know things are tough. And so it is with Journal Register (NYSE:JRC). Couple a tough overall environment for newspaper operators with more region-specific economic problems in major operating areas like Michigan and Cleveland, and you've got a recipe for tough times.
Overall revenue dropped more than 2% as ad revenue fell nearly 4% and circulation revenue dropped by a little less than that. And though the company is doing a commendable job on reining in controllable costs (non-newsprint cash operating expenses were down about 2%), operating income still fell 12% when you exclude special items. On a slightly more positive note, EBITDA fell by a lesser amount (10%) and free cash flow is still in the black.
Results at Journal Register are certainly variable by geography. As I said, the Michigan and Cleveland clusters are weak and that played a role in the nearly 4% pro forma decline in ad revenue. Without those two clusters, retail ad revenue would have been flat and real estate classifieds would have been up.
Of course, you can only take this "look here, but don't look there" business so far. After all, one of the positives of Journal Register is that it's not quite so vulnerable to national ad campaigns from the likes of General Motors (NYSE:GM) or Sears (NASDAQ:SHLD). But if you take the positives, you have to take the negatives as well -- in this case, an above-average sensitivity to regional economies relative to larger players like Gannett (NYSE:GCI) or Dow Jones (NYSE:DJ).
There is a high debt load here and that ups the danger quotient, even with the company's above-average cash flow generation ability. After all, interest payments gobbled up nearly 40% of operating income this quarter. But I still want to believe that community-focused newspapers are a good way to combat the shifts we're seeing nationwide from newspaper-reading to Internet-surfing for news and information.
I've liked Journal Register better than other newspaper operators, but not so much that I actually own it. I'd also be remiss if I didn't point out that it's quite close to a 52-week low. I still have this one high up on my list of value ideas, but until I pull the trigger myself I can't really recommend that anybody else do so either.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
