2Q06 earnings and commentary from Gannett (GCI) can best be described as more of the same. Neither the numbers nor the Q&A provided significant new insights. GCI remains stuck in a no-growth environment with no prospects for a pickup. The only bull case is that the stock is getting cheap on a historical basis and investors have begun to ignore the company. However, given that the lack of growth is due to secular issues, the stock should be cheap.
The shares have reacted poorly to the quarter even though the numbers were in line with expectations and commentary suggested that 2H06 results are likely to match consensus. I think the decline has to do with management’s commentary related to share repurchases and acquisitions. GCI has a strong balance sheet and generates of $1.2 billion in free cash flow. In the latest quarter especially, management slowed the share repurchase activity in favor of acquisitions. In the only testy exchange on the call, one analyst pressed management as to why they wouldn’t pick up the pace given that the stock was at the same price as it was in 1997. Management responded that they consider the return on acquisitions compared to share repurchase when deciding how to use their cash. Apparently, for now, management is willing to invest in hard assets in newspapers and TV rather than repurchase stock. Since investors view these assets as having weak long-term fundamentals, they are unhappy with the decision. Investors seem to want a Tribune (TRB) type recapitalization and GCI management isn’t giving any hints this might be in the cards…..

GCI is also willing to buy internet assets. Growth in currently owned assets remains strong, in line with overall internet advertising growth. GCI would still like to buy the portion of CareerBuilder that is owned by McClatchy. Management said they hope to know if that is possible by the end of the third quarter.
Looking more closely at the quarter, EPS and revenue came in at $1.31 and $2.03 billion, matching estimates almost exactly. Adjusting for GCI’s recent M&A activity, the newspaper business had revenue growth of around 1%. Domestic revenue grew 2%, while the UK remained a drag. Management did say they were seeing some stabilization in the UK. Expense growth was also around 1%, a slightly better than expected outcome. Management seemed to offer some hope that newsprint fundamentals were weakening which could benefit GCI later this year or in 2007. Broadcasting growth was 3.2%, a little below expectations but management said an anticipated pickup in political ads late in the quarter would pull the number back up.
There were no changes in recent newspaper advertising trends that have seen local better than national, good growth in real estate classifieds and weak results for automotive. Analysts did query about the sustainability of real estate growth and management said “for now OK, but….” Analysts also seemed a little concerned that help wanted, a previously strong category was slowing more rapidly than expected.