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April 23, 2008

Keeping An Eye On Gannett

It is has been a long fall from grace for Gannett. Still regarded as one of the best managed media companies and clearly regarded as the best managed newspaper company, GCI's 1Q08 earnings report came and went with barely a notice. I suppose that is not all bad since the numbers were no good and the shares have sunk back to multiyear lows since the report.

I still keep a close eye on GCI because of its strong management and what looks like a ridiculously cheap stock. Granted GCI is in a declining annual EPS trend buy current estimates for 2008 are close to $4.00, putting the shares at a measly 7 times EPS. On the industry standard EBITDA multiple, the shares are also cheap, at just over 5 times 2008 estimates. GCI shares have a current yield of 5.7% with a dividend that looks secure at just a 40% payout ratio. Amazingly, GCI shares are one of the cheaper in the group despite its highly regarded management and lightly levered balance sheet.

Trends at GCI aren’t different form the other newspapers. The three pillars of classified advertising, help wanted, auto, and real estate are dropping sharply for secular and cyclical reasons. GCI shares took its earnings particularly hard because management said its trends worsened in March with the second half of the month particularly weak. GCI also witnessed a sharp slowing in online growth, something it shared with New York Times. Given that online revenues are supposed to grow rapidly and eventually offset declines in print advertising, this is terrible news....

Despite the lousy fundamentals, I have my eye on GCI as a long idea. The upside would come from easier comparisons later this year, the present value of what should be a 20 year stream of at least stable dividends, and the possibility that the company more aggressively returns cash to shareholders. This last point is an issue for GCI investors because the company continues to be open to acquisitions of newspaper properties.

A clear ruling out of large acquisitions and an easing of estimate cuts are the triggers for some upside. So far neither of those things is evident but just because every else is ignoring GCI doesn’t mean you should. I'm not.

....Despite the lousy fundamentals, I have my eye on GCI as a long idea. The upside would come from easier comparisons later this year, the present value of what should be a 20 year stream of at least stable dividends, and the possibility that the company more aggressively returns cash to shareholders. This last point is an issue for GCI investors because the company continues to be open to acquisitions of newspaper properties.

A clear ruling out of large acquisitions and an easing of estimate cuts are the triggers for some upside. So far neither of those things is evident but just because every else is ignoring GCI doesn’t mean you should. I'm not.

Posted by Steve Birenberg at April 23, 2008 01:52 PM in GCI