Gannett Looks To Be A Survivor

By Stephen D. Simpson, CFA | July 20, 2011 AAA

The "newspapers are doomed" theme has been making its rounds for over a decade now, buoyed in large part by the fact that it's basically true. For the most part, the days of the locally-owned and operated daily newspaper are long gone, or at least gone insofar as a growth story. But that doesn't automatically mean that large media companies like Gannett (NYSE:GCI), New York Times (NYSE:NYT) and McClatchy (NYSE:MNI) are doomed. The question, though, is whether there's any clear way for these companies to unlock whatever value remains of their businesses.

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Another Gloomy Quarterly Report
Gannett did not post disappointing numbers for the second quarter relative to expectations, and that may be the best that can be said about it. Revenue was down a bit more than 2%, led by the ongoing erosion of the publishing business. Publishing revenues were down almost 5% on a greater than 6% drop in ad revenues. Broadcasting was ever so slightly positive and though digital revenue was up more than 12%, it still comprises just about 13% of total revenue.

Margin and profit performance were likewise uninspiring. Operating income fell more than 11% on a reported basis and about 9% on an adjusted basis. EBITDA margins basically tracked the trajectories of the respective businesses - down about two points in publishing, up a bit in broadcasting (which has far and away the highest margins), and up nicely in digital.

While Gannett posted a slight beat on the bottom line, it is unlikely to excite investors. News of a higher dividend and a $100 million buyback, though, are more encouraging.

A Tough Year Unlikely to Get Markedly Better
It is hard to see how Gannett's revenue is going to improve all that significantly this year. Ad spending is poor, and it is not hard to see why. Auto sales have been mixed of late (better than last year but not as much as expected) and companies like Ford (NYSE:F), General Motors (NYSE:GM), and Toyota (NYSE:TM) are still major print advertisers. Likewise, hiring is not especially strong and classified listings have been weak.

Longer term, it is just difficult to see how print advertising is going to get better. Major retail chains like Best Buy (NYSE:BBY) and Lowe's (NYSE:LOW) have faced the reality that print advertising just does not drive traffic like it used to, and companies like Groupon and Google (Nasdaq:GOOG) may very well permanently change the coupon market.

But Not All Hope Is Lost
All of that said, Gannett is not doomed. The company's CareerBuilder site is a leader in its category and holds its own against the likes of Monster Worldwide (NYSE:MWW) and its Monster.com. Likewise, digital may be more of a growth opportunity than some presently believe; e-readers may give national print companies like Gannett, New York Times, News Corp's (NYSE:NWS) Wall Street Journal, and Washington Post (NYSE:WPO) a viable survival path and a new subscriber base.

There's also the TV business to consider. Local TV is still surprisingly profitable and the major upcoming election cycle should be an opportunity to reap revenue. Moreover, while Gannett does have debt, that would not automatically preclude the company from expanding its TV footprint (assuming the company can navigate FCC rules on this subject).

The Bottom Line
Unfortunately, there's no going back for publishing companies like Lee Communications (NYSE:LEE) or Journal Communications (NYSE:JRN). Like so many other markets nowadays, media and publishing is becoming winner-takes-all; instead of having many companies earning decent amounts of money, the money is going to be increasingly controlled by a much smaller group of national players. As one of those giants, Gannett should have considerable staying power.

The key question is when (or if) the company can staunch the revenue declines and margin erosion and reestablish a stable (if not growth) profile. Gannett has done a good job of diversifying itself and there is definitely some potential in the digital platforms. The problem is that even though a conservative discounted cash flow analysis suggests Gannett is meaningfully undervalued, psychology plays an important role on Wall Street and it could be a very long wait before investors warm up to the idea that there's meaningful value in these shares. (For additional reading, see Profit By Understanding Fundamental Trends.)

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