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January 26, 2006

Gannett Earnings Preview

Gannett (GCI) wraps up a busy week of newspaper earnings on Firady before the open. Consensus for the fourth quarter calls for EPS of $1.41 and revenue of $2.0 billion. Management has guided to the low end of $1.40 to $1.44. If the report is inline, the year will end up at $4.94, flat with 2004. Current 1Q06 consensus is for $1.07 on revenues of $1.94 billion. 2006 full year is projected at $5.25, +6%, on revenues of $8.0 billion, +5.5%. GCI estimates have been falling over the last 90 days.

GCI shares are trading slightly below the group average EBITDA multiple, an unusual occurrence for what is considered the blue chip newspaper stock. Reasons for the multiple contraction include slowing advertising revenue growth relative to the group, higher broadcasting exposure, and acquisition risk....

For many months, GCI consistently produced monthly ad revenue growth above the group average. Recently the company has matched or fallen short of its peers. One of the problems is the company's UK newspapers which are really hurting. GCI's broadcasting exposure is concentrated in NBC affiliates. Given that network's ratings difficulties, this has hurt performance of the TV stations relative to a lousy year for TV in general. NBC stands to improve in 2006 as ratings probably won’t get much worse and the Winter Olympics should provide a boost next month.

GCI has a long history of smart, accretive, value enhancing acquisitions. However, the market is quite concerned about the company's possible interest in Knight-Ridder (KRI). A large acquisition in the secularly challenged newspaper industry at a 20% multiple premium to its own stock is something to worry about. Fears it could turn out badly, similar to the problems Tribune (TRB) has had with its purchase of Times Mirror, are understandable. I think GCI could handle the deal given that its margins are the highest in the group and at least 500 basis points above KRI's. GCI would also gain more control and exposure of internet properties co-owned with KRI.

I am on the sidelines in GCI and the whole group. I fear that recent uptick in advertising trends at other companies will prove to be another false start for the group and I don’t find the newspaper stocks to offer relative value in the media sector. GCI is clearly a quality company, probably THE quality company in the group. If industry trends pick up it will rise and be a decent investment. If that happens, I'd rather own Disney which will benefit from renewed interest in ad supported media stocks.

Posted by Steve Birenberg at January 26, 2006 03:47 PM in GCI