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October 12, 2005
Gannett 1Q Results: Nothing To Get Excited About
Gannett (GCI) shares initially bounced about 1% off of depressed levels in response to the company's 3Q05 earnings report before retreating to new lows as the market fell on Tuesday and Wednesday. The quarter was pretty much in line with expectations and no unexpected news came out on the conference call....
....EPS after adjustments came in at $1.13, down 3% pro forma, exactly in line with analyst estimates. Revenues of $1.86 billion, down 1% pro forma, were very slightly ahead of expectations. The dominant newspaper division had pro forma revenue growth of 1.3% and expense growth of 1.7%. Analysts seemed impressed by the expense figure. Management said that UK results are holding back the newspaper division and noted that ex-UK, newspaper revenues would have been up 4%. This would put GCI at the high end of the group and gives some sense of the potential operating leverage if revenues could grow at mid-single digits against continued tight cost controls.
Television remains quite weak but most of the problem is related to difficult comparisons to Olympic and political spending in 2004. In 3Q05, GCI faced a $50 million comp which will be similar in 4Q05. Based on $1.8 billion in quarterly revenue, this cost GCI about 250 basis points in revenue growth. This problem will reverse to a positive in 2006. In response to a question, management said that in 2002, the last off-year election/Olympic cycle, the company picked up about $104 million in combined revenue.
My key takeaway from the press release and conference call is that GCI remains best in class despite fundamental industry-wide headwinds. On revenue and expenses, GCI produces about the numbers in the newspaper industry. Unfortunately, these figures provide no growth. Consequently, with the stock trading at an average multiple of EBITDA relative to the group and its own history, there is no reason to be long the shares.
More so than other stocks in the group, GCI offers potential operating leverage if revenue growth picks up in the newspaper division. However, given the ongoing long-term fundamental challenge posed by the internet, readership demographics, and consolidation among key industry advertisers (retail and wireless), there is no reason to bet on operating leverage without some real evidence of a sustainable turn in revenues. I remain on the sidelines without much interest in getting involved.
Posted by Steve Birenberg at October 12, 2005 02:53 PM
