Should companies consider reverse stock splits in these tumultuous times? Yes, says Adele Hogan, a partner in the global law firm of White & Case: "Reverse stock splits are a win-win for shareholders and companies, particularly when paired with a reduction in authorized capital. A reverse stock split gives companies a mechanism for retaining investor confidence and for weathering market downturns." A reverse split reduces the number of shares outstanding and boosts the per-share price. Historically, it may have been viewed negatively, since it could be used to make a stock look more valuable even if nothing else had changed. Time Warner (TWX), Sirius XM Radio (SIRI) and newspaper-publisher Lee Enterprises (LEE) all have reverse stock splits in the works.

The stock is selling for way below its book value of 23.52.

7.3%

Lee Enterprises, a Davenport, Iowa-based newspaper publisher, recently announced a share buyback plan of up to $30 million, through cash. The company has been generating robust cash flows and has also been able to reduce its debt by $135 million in fiscal 2007 and by $179 million in 2006.

Lee's net income rose to $81 million in the fiscal year ended Sept. 30, 2007. Earnings per diluted share grew more than 13% to $1.77. Print media have been plagued by a shift in advertising to the Internet, and Lee is also a victim of this trend. Like most of its peers, Lee has been trying to ramp up its online ad revenue. Although 2007 was a difficult year for the entire newspaper industry, the decline in Lee's ad revenue has been less severe than the industry average.

Credit Suisse, which earlier last month initiated coverage of Lee with a neutral rating, said in its report to clients that Lee's sales culture and asset mix would enable it to outperform its peers, with smaller markets being "better insulated from the structural changes weighing on the newspaper industry's growth rate."

However, the company's margins and ROIC were less impressive, the analysts added. Deutsche Bank, which has a buy rating on Lee, lowered the price target to $26, citing industrywide trends.

Shares have plunged around 60% in the past year and are trading significantly below their 52-week high of $35.65. The trends in the newspaper industry are likely to continue to be worrisome.

However, there is some hope. According to a recent Borrell Associates study, local online ad spending is expected to grow by 48% in 2008 to $12.6 billion. While this represents a significant opportunity, Lee (and most of its rivals for that matter) will take time to switch its focus to this arena, and progress on this front is unlikely in the near term. But I believe the stock, which yields 7.10%, will generate good returns in the medium to longer term.

Upgraded by Wachovia from Underperform to Mkt Perform

Upgraded by Deutsche Securities from Hold to Buy

Downgraded by Matrix Research from Buy to Hold

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