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January 30, 2006

Gannett: A Little Better But Is It Sustainable?

Gannett (GCI) shares are rallied strongly, up about 3%, following the company's fourth quarter earnings report issued before the open on Friday. The action is similar to the response to earnings from New York Times (NYT) and Dow Jones (DJ). Investors are reacting positively to stronger than expected trends in December advertising, hoping this time renewed advertising strength won’t be a false start. All three companies reported EPS that were slightly better than expected which also drove some optimism. Most of the strength is in national advertising, something these three companies shares vs. other newspaper stocks that are driven by more by local ad trends. Local trends remain weak across the board.....

GCI reported $1.44 against a consensus estimate of $1.41. EPS were at the very top of the range management guided to in December. Revenues came in about $20 million above consensus, not a meaningful figure on a base of $2 billion. Pro forma for various M&A transactions, revenues were down 1.9% and expenses also fell by 1%. GCI produces lots of free cash flow and has a strong balance sheet which led to the repurchase of 3.2 million shares during the quarter. As mentioned, December was strong driven by USA Today and better performance from the company's stable of mostly NBC-affiliated TV stations. Again, USA Today is similar to the New York Times and the Wall Street Journal in that national advertising is a significant driver of results. Overall, for the fourth quarter, GCI's newspapers reported 1.1% ad revenue growth, but excluding the continuing significant weakness in the UK, the growth rate would have been 3.2%. Rela estate and help wanted continue to be strong categories while auto advertising remains awful, declined over 15% again. The shift of auto advertising to the internet seems permanent. Eventually, the comps will flatten but anyone looking for a rebound in this previously important category is likely to be disappointed.

Management gave no detailed guidance but did indicate trends remain "choppy" and hard to predict. Just like at NYT, January appears to be a step back from December but remember that January is a small month. Also, just like NYT, management appears confident that February and March will rebound.

I did not get a lot out the GCI call, probably because I had already listened to NYT and DJ this week and much of the commentary and Q&A was the same. As mentioned in the preview, GCI is the premier name in the newspaper group and the shares are trading at an unusual discount to the industry. This sets up GCI as a good stock to own if the improved performance in 4Q05 and December is sustained. My confidence on that remains low. GCI also will face a headwind until the Knight-Ridder (KRI) auction is resolved since the company is participating and is the only logical industry buyer besides McClatchy (MNI).

Posted by Steve Birenberg at January 30, 2006 01:55 PM in GCI