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Why Gannett May be Regaining Its Strength

March 25, 2014 | About:
Pato Kehoe

Patricio Kehoe

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Gannett Co. Inc. (GCI) is one of the largest media conglomerates in the industry, with its three business divisions publishing, broadcasting, and digital. With the publishing sector facing strong headwinds as consumers gradually shifted towards digital media options, the company decided to acquire the TV company Belo in 2012, with the hopes of reversing the steep decline in revenue experienced since 2007. Today, with the acquisition almost fully integrated, the firm is back on track and the future is looking bright. This probably led to investment gurus Steven Cohen (Trades, Portfolio) and Leon Cooperman (Trades, Portfolio)’s recent purchase of the company’s shares.

Time for a Reboot

With Belo under its wing, Gannett has recovered some of its lost confidence, as the company’s TV station ownership doubled to 43%, increasing broadcasting profits’ contribution to 50% and now accounting for 60% EBITDA (which showed a sluggish -8.2% growth rate in 2013). Furthermore, the increased scale will garner the company with stronger bargaining power when negotiating with content providers, resulting in a reduction of the firm’s royalty payments and increasing advertising rates. Also, the combination of Gannett’s various FCC licences and content partnerships have earned the company an oligopolistic position in local markets, ranking amongst the five largest local broadcasters (with CBS Corporation (CBS) and Comcast Corporation (CMCSA)’s NBC, among others). With a reach of 30% of domestic households, the firm is sure to see a boost in sales, as political advertisers will continue to allocate about 80% of their budgets to local broadcasters, given their extensive reach.

Gannett’s publishing business, however, has seen brighter days and the division profits are, in fact, 25% of what they were in 2007. While management has implemented paywall monetization in order to offset advertising’s migration toward the digital segment, I’m more impressed by the company’s bold move to save its USA Today paper. This week, USA Today Sports Media Group announced its new strategic partnership deal with Internet video provider NeuLion, Inc., which will bring its network of sports publishers (170 NCAA digital properties) to USA Today. This deal will include shared sales of advertising sponsorships, and joint production/syndication of content regarding college sports, which will be accessible via mobile devices. I believe this strategic move will help offset the expected 3% average annual revenue decline in Gannett’s publishing segment.

Valuation

While the new partnership with NeuLion is certainly beneficial, long term prospects regarding Gannett’s publishing business are sceptical, as 2013’s 1.6% decline in circulation and 5.9% decline in ad sales mark a downward trend that is bound to remain as readers and advertisers migrate toward digital media. Nonetheless, broadcasting results should experience a strong rebound in years to come, with retransmission consent fees reaching $330 million in 2014 (20% of sales). As political advertising picks up speed, 2013’s weak -0.7% revenue growth should experience a significant boost to 15% and settle at an average 5% growth rate over the next five years, with broadcasting accounting for 70% of all operating profits.

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Projected operating margins should rise from the current 14.3% to an average 19.5% by 2018, due to Belo’s integration, yet offset by declines in the publishing segment. Also, the newly won scale advantage in the TV business allow for returns on capital exceeding costs, thereby boosting the current ROA of 4.21% upwards. Despite Gannett’s current debt level, which doubled with the Belo acquisition, and a strong reduction in cash flows, I believe the company will be successful in the long term, as long as management adjusts to changes in the industry. The stock’s current trading price of 17.9x trailing earnings is also sporting a 5% price discount relative to the industry’s average, so investors should jump in the share boat now, before this trend is reverted.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

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