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.

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.

Another Dull Quarter From Gannett

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.

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).

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.

Gannett 1Q Results: Nothing To Get Excited About

Gannett (GCI) shares initially bounced about 1% off of depressed levels in response to the company's 3Q05 earnings report before retreating to new lows as the market fell on Tuesday and Wednesday. The quarter was pretty much in line with expectations and no unexpected news came out on the conference call....

....EPS after adjustments came in at $1.13, down 3% pro forma, exactly in line with analyst estimates. Revenues of $1.86 billion, down 1% pro forma, were very slightly ahead of expectations. The dominant newspaper division had pro forma revenue growth of 1.3% and expense growth of 1.7%. Analysts seemed impressed by the expense figure. Management said that UK results are holding back the newspaper division and noted that ex-UK, newspaper revenues would have been up 4%. This would put GCI at the high end of the group and gives some sense of the potential operating leverage if revenues could grow at mid-single digits against continued tight cost controls.

Television remains quite weak but most of the problem is related to difficult comparisons to Olympic and political spending in 2004. In 3Q05, GCI faced a $50 million comp which will be similar in 4Q05. Based on $1.8 billion in quarterly revenue, this cost GCI about 250 basis points in revenue growth. This problem will reverse to a positive in 2006. In response to a question, management said that in 2002, the last off-year election/Olympic cycle, the company picked up about $104 million in combined revenue.

My key takeaway from the press release and conference call is that GCI remains best in class despite fundamental industry-wide headwinds. On revenue and expenses, GCI produces about the numbers in the newspaper industry. Unfortunately, these figures provide no growth. Consequently, with the stock trading at an average multiple of EBITDA relative to the group and its own history, there is no reason to be long the shares.

More so than other stocks in the group, GCI offers potential operating leverage if revenue growth picks up in the newspaper division. However, given the ongoing long-term fundamental challenge posed by the internet, readership demographics, and consolidation among key industry advertisers (retail and wireless), there is no reason to bet on operating leverage without some real evidence of a sustainable turn in revenues. I remain on the sidelines without much interest in getting involved.