Gannett (GCI) is the nation’s largest newspaper company, publishing the iconic USA Today along with daily newspapers in 109 local markets in the United States and 160 local brands in the United Kingdom, explains George Putnam, editor of The Turnaround Letter.
Gannett’s digital presence is strong and growing: over 23 million people have downloaded the USA Today app, and 110 million unique monthly visitors access its online media content.
Founded in 1906, the company expanded nationally by acquiring local newspaper companies and launched USA Today in 1982. Not one to sit still in the face of its secular headwinds, Gannett continues to make aggressive moves to further develop its business model toward digital media.
In 2015 it split off broadcasting operations (Tegna), and last year it acquired Journal Media and bought ReachLocal, a digital marketing firm.
Investors apparently see a company that keeps doubling down on the declining newspaper industry with grim chances of producing much return for shareholders.
With the company trading at a remarkably low 3.8x cash operating profits (EBITDA), the market appears to have given up on Gannett.
The market has missed several important parts of the Gannett story. First, Gannett has a disciplined approach to deals, as demonstrated when it walked away from the Tribune Publishing (Chicago) bidding last year when the price rose too high.
Also, the company is extracting significant cost savings and other synergies from its mergers. Critically, while the market sees only double-digit advertising declines, it misses the fact that these have been largely matched by comparable cost declines.
Gannett continues to make the transition to the digital world. Digital revenues are growing and now approach a third of total revenues.
Moreover, the company is attracting one of the largest audiences of millennials in the digital information sector. Gannett’s brands are reaching more people digitally than Netflix (NFLX), CBSnews.com, BuzzFeed.com, New York Times Digital or WashingtonPost.com.
Cash flow is healthy, likely to be close to $90 million this year even after funding the high dividend. And the balance sheet, with just $395 million of debt, is only about 1.2 times EBITDA and partly offset by $90 million of cash. Another source of cash: a surplus real estate portfolio worth perhaps $80 million is steadily being liquidated.
Like any contrarian stock, Gannett is not without risks. The newspaper business is clearly under stress, and so Gannett must carefully migrate further into the digital world without many mistakes.
While the dividend with a very generous 6.9% yield looks sustainable, it could be cut if the company becomes cash-constrained. Nonetheless, with its heavily discounted valuation and tremendous brands, it wouldn’t take much good news to handsomely reward shareholders. We recommend Buying Gannett up to $14.
George Putnam has edited The Turnaround Letter since its founding in 1986.
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