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Why John Rogers of Ariel Capital Managemnent own 13% of Gannett

November 10, 2009 | About:
Mike Covello

Mike Covello

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John Rogers owns 29 million shares of GCI or roughly 13% of the company. Why would an investor want to own a newspaper company? Everyone will tell you that newspapers are a dying industry. My two sons, both in college, will insist that they will never read newspapers, but instead will continue get all of their information free from various free on-line sites. So what's to like here? Lets go over a few valuation metrics. GCI closed at $11.16 yesterday, down from a recent high of $14 and change, and an all-time high of $89 in 2003.

Expected EPS of $1.60 in 2009, a PE of 7

Value Line forecast of 2010 EPS of $2.10, a forward PE of 5.3

Dividend yield of 1.7%

ROE 26%

FCF of $2.35 for 2009 a price to FCF ratio of 4.7

FCF anticipated at $2.80 for 2010 a forward price to FCF ratio of under 4

Obviously, based on the above metrics the market agrees this is a business in decline, but is GCI only a newspaper company? GCI is comprised of three businesses. It is the largest newspaper publisher is the U.S. with 83 dailies in 36 states with circulation of 6.6 million. Its largest daily is USA today with circulation of 1.9 million. GCI owns 23 TV stations reaching 18% of the U.S. population. Lastly, and perhaps most importantly, GCI has a digital operation whose most important component is Career Builder (51%) owned. The operating income figures for the 9 months ending 9/30/09 are as follows

Newpaper $328 million

Broadcasting $137 million

Digital $42 million

What this market is missing here is that Career Builder, which is the by far the largest component of the digital division, is growing rapidly. Its operating income was up 70% year over year. Career Builder is the largest online job site putting 1 million jobs in front of job seekers and hosting more than 23 million visitors to its web site monthly. As job hunters increasingly turn to the internet for job postings Career Builders is in a sweet spot going forward.

This growth engine is obscured right now by the newspaper division which has shown a precipitous decline in revenues and operating income for the last 2 years. However, at a PE of 7 I believe the worst of all possible scenarios is priced in. The newspaper division can continue to decline forever, a scenario I don't particularly adhere to, but the digital division should more than be able to pick up the slack. A well below market PE of 10 would make for a $21 stock next year a return of 88%.


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