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April 20, 2007

Gannett: Still Cheap But Still To Be Avoided

Special thanks to my intern, Megan Brinkman, a soon-to-be graduate of Northwestern's MBA program, who did most of the work on GCI this quarter due to a conflict I had with the conference call. The following summary was written by Megan and edited by me.

Consistent with what we are seeing across the newspaper industry, there was little excitement in Gannett’s (GCI) 1Q07 results. As expected, GCI highlighted its continued focus on cost performance in an effort to mitigate some weak revenue trends. Despite management’s adeptness at managing expenses which helped hold its operating margin decline at 100 bps, there is little else to rave about as GCI and the rest of the industry continues to face a challenging revenue landscape.

There is little relief in the near-future for declining ad revenues with the drag coming from all three primary categories including auto, -15.8% this quarter; employment, -8.3%; and real estate, -11.3%. The negative results for real estate are likely to hold even longer than those for employment and auto since GCI is exposed to weakening housing markets in Florida and California.

1Q07 EPS were 90 cents compared with 99 cents a year ago and a consensus estimate of 89 cents. UK operations and online revenue made the largest positive contributions to results. Real estate and help wanted advertising in the UK appears to have completed a multi-year bottom. Additionally, CGI's UK subsidiary, Newsquest, is an Internet leader in the UK where its network of Web sites attracts more than 4.8 million unique users. Finally, currency worked in GCI's favor this quarter....

In the US, GCI has more than 100 domestic publishing Web sites, including USATODAY.com, one of the most popular newspaper sites on the Web. In 1Q07, Gannett’s consolidated domestic Internet audience share was approximately 23.1 million unique visitors reaching 14.6 percent of the Internet audience. Online revenue remains too small to drive growth at GCI but the company is making progress and focused on building the business organically.

One other important point is that Gannett uses FIFO accounting for newsprint which resulted in an inability to capitalize on lower newsprint prices in the first quarter as experienced by others in the industry. This made GCI's performance expense appear to lag its peers.

Based on EBITDA or P-E multiples CGI shares are the cheapest in the newspaper industry. There is noted concern from investors that rather than employ share buybacks or a substantial dividend increase GCI might focus on newspaper or internet acquisitions. While GCI highlights its strong track record with several tuck-in acquisitions, the present concern surrounds perceptions that these would be investments in either a declining business or in the case of internet properties highly dilutive. On the call, GCI did nothing to alleviate these concerns, stating only that they were still willing to consider the right opportunities.

Consequently, investors would be well served to remain cautious. CGI, like its peers, continues to battle the head winds of a no growth industry. With continued pressure on earnings and revenue likely in the near-term, upside in the stock is hard to fathom. I'd stay on the sidelines until the shares broke to significant new lows.

Posted by Steve Birenberg at April 20, 2007 09:43 AM in GCI