Is Gannett a Value Trap? by Jonathan Heller
Is Gannett a Value Trap?
Publicly traded newspaper companies have been taking it on the chin due to falling ad revenue, declining circulation, and belief by some that the internet will ultimately do to newspapers what the automobile did to the buggy whip.
Gannett shares currently trade at just one fourth of where they did three years ago; shares are so beaten down that prospective investors evaluating the company might think they were looking at a high-yield bond given the company’s current 8.39% dividend yield. A dividend of that magnitude is telegraphing one of two messages to investors: Either the dividend is not sustainable, and is likely to be cut, or the markets have all but given up on this company.
Although recent results have shown declining revenue and earnings, this company is in better shape than the stock price and dividend yield suggest. Fiscal year 2007 revenue did fall 7.4% to $7.44 billion, while net income fell 9% to $1.06 billion. Still, that equates to a healthy 14.2% net profit margin. Second quarter results showed further declines: revenue fell 11%, while net income declined 36%, and that excludes a writedown (non-cash, primarily goodwill) in the neighborhood of $2.6 -$2.9 billion. The company continues to generate cash-more nearly$800 million the past 4 quarters (q2 CF data not yet available) - and as long as that continues to be the case, you can’t write Gannett off just yet.
The company ended Q1 with more cash on the books ($166 million) than it has in any of the past 20 quarters and long term debt below $4 billion for the first time since 2004. Gannett continues to buy back stock, having reduced shares outstanding by 6 million shares, or 2.6 % since the first quarter of 2007. While there are additional risks if the economy (and ad revenue) slips further, it appears as though the market may have this one wrong, at least longer term.
What may be forgotten is Gannett’s impressive array of assets which includes 85 daily US newspapers with paid circulation of 7.3 million, plus 900 non-daily publications in 31 states. The flagship is mega brand USA Today, the largest US newspaper in terms of circulation (2.3 million). The company’s broadcasting operation consists of 23 TV stations, reaching 20 million viewers, while the internet site attracts more than 25 million unique visitors per month. As value investors, we might call this a value play (others might call it a value trap), while we may freely admit that growth drivers are difficult to identify.
Of course, one burning question is whether Gannett will cut its dividend, as the current stock price is suggesting. That possibility appears remote at this point, given cash flow that is more than adequate to cover the current dividend. As for catalysts to get this stock back on track, it’s all about the economy. Ad revenues need to stabilize, which should happen once the economy starts to pick up steam. When that will happen, given all the current risks, is uncertain at best.
As a postscript, I know firsthand the devastation that falling advertising revenues can bring: I saw it firsthand when Bloomberg pulled the plug on Bloomberg Personal Finance magazine, (for which I served as Senior Markets Editor) in early 2003.
Jonathan M. Heller, CFA
Author is long Gannett