This is a past Premium member recommendation
Media and publishing has long being considered a Value Trap with venerable companies like Gannett (GCI) relegated to the bargain bin. Even the perennial Buffett holding, The Washington Post, is currently selling for 1/3rd of the highs it reached in 2005. The fall of Gannett has been more spectacular. At one time, the stock was changing hands at $88/share. In March, 2009, the same stock could be bought at $2.2/share – a 97.5% decline. Interestingly, after adjusting for write downs of goodwill and intangibles, Gannett has been profitable every year in the last 10 years.
Today, Gannett stock can be purchased at $15.25/share (as of close, Feb 24, 2012). This means if you have bought the stock at the lows in 2009, you could already be sitting at a 700% profit in just about 3 years. So much for being a value trap! The valuation today is not so distressed, but I feel that the stock still presents a compelling value in the light of the recent revitalization plan the Gannett management laid out.
There is much to share. I just finished going through 155 pages of their latest annual report and I will try to keep this as concise as I can and at the same time hit all the relevant points necessary to make an intelligent decision about Gannett stock. So bear with me as this analysis is a little long, and please ask me questions where you feel additional information is needed.
Let’s start with a recap of Gannett’s business over the last 10 years and how the stock has performed. While generally past performance is not relevant to the current and future prices and valuations, it does provide clues to the evolving business strategy, which we will look at next, which we need to make informed decision about the stock valuation.
Current Key Indicators and Historical Data
| Price | 15.25 | Market Value | 3614.25 |
| P/E | 7.23 | P/FCF | 4.7 |
| Revenues (FY 2011) | 5240 | EPS | 1.99 |
| Div/Share (forward) | 0.80 | Div Yield | 5.25% |
| Book Value of a share | 2327.9 | P/B | 1.55 |
| LT Debt/Invested Capital | 43.1 | LT Debt | 1,760.40 |
All numbers in $millions except per share amounts and %s
The key here is to note that while the earnings last year were $500 million, the company generated almost $775 million in free cash flow. The company has used the bulk of its cash flows over the last few years to repay and restructure their debt. As a result, the long term debt is down from $5.4 Billion in 2005 to $1.76 Billion today. Over the last few years as the company focused on strengthening their balance sheet (paying down debt, taking goodwill charges, etc), their dividends were reduced. With the new growth strategy, Gannett is once again focusing on returning wealth to the shareholders and as a result they increased their dividend 150% recently giving the stock an yield above 5%. The current PE ratio of 7.23 (using adjusted eps to account for special charges), is attractive, but since the company is still in the transformation mode, it is perhaps more appropriate to focus directly on the free cash flow. Their Price to FCF ratio is just 4.7 which is quite low. In other words, if you invert this number, it means that Gannett today generates 21.27% in free cash flow per dollar you invest in its stock.
The following table summarizes last 5 years of key performance data.
| 2007 | 2008 | 2009 | 2010 | 2011 | |
|---|---|---|---|---|---|
| Cash/Equiv | 77.2 | 98.9 | 98.8 | 183 | 166.9 |
| Intangibles | 735.5 | 582.7 | 565.6 | 518.8 | 502.2 |
| Goodwill | 10034.9 | 2872.9 | 2854.2 | 2837 | 2864.9 |
| Total Assets | 15887.7 | 7796.8 | 7148.4 | 6816.8 | 6616.5 |
| Short Term Debt | 0 | 0 | 0 | 0 | 0 |
| LTD | 4098.3 | 3816.9 | 3062 | 2352.2 | 1760.4 |
| Total Liabilities | 6870.6 | 6740.9 | 5544.5 | 4653.1 | 4288.6 |
| Equity | 9017.2 | 1055.9 | 1603.9 | 2163.8 | 2327.9 |
| Free Cash Flow | 1175 | 833 | 810 | 816 | 775 |
| Sales | 7439.5 | 6767.7 | 5613 | 5438.7 | 5240 |
| Gross Margin | 44% | 41% | 41% | 45% | 43% |
| Operating Margin | 22% | -100% | 13% | 18% | 16% |
| Reported Net Income | 975.6 | -6647.6 | 355.3 | 601.9 | 500.1 |
| Normalized Net Income | 1047.6 | 1328.9 | 488.2 | 659 | 527.4 |
| EPS (normalized) | 4.48 | 5.82 | 2.07 | 2.57 | 1.99 |
| Div/Share (for the year) | 1.33 | 1.6 | 0.16 | 0.16 | 0.24 |
| Shares O.S | 230.2 | 228.4 | 237.2 | 239.5 | 237 |
2008 saw substantial impairments taken against the goodwill and intangibles accounts, which caused the reported net income to take a significant hit. This was the primary cause of the stock price to put in a low at $2.2/share in early 2009. The company has also gone through several restructurings where it disposed off its non performing assets and has worked hard to pay down its debt. As you can see, Gannett now seems to have turned a corner and has 2 years of good operating history to confirm it. By one measure, Return on Invested Capital (ROIC), Gannett is now operating at 12.2% which is close to being the high in its last 10 years of operating history.
In 2011, new management and a new CEO was installed at the company and they have now come out with a plan to launch Gannett towards a growth path. I will cover this in Part 2 and then wrap up the investment thesis in Part 3.