This is a past Premium member recommendation
Let’s start by considering some of the key projections that the Gannett (GCI) management has laid out. While it is not certain that the plan will work completely, or even close to being as envisaged, this is as good a starting point as any.
|Plan (2011 – 2015)||Publishing||Broadcast||Digital||Overall||2009-2011 Average|
|Operating Margin Range
(Overall figures are NIBT, which include interest paid)
In addition to the revenue growth in its segments, the company plans to generate an additional $100-$150 million in cost savings through asset optimization and efficiency increase.
Using the 2011 FY data as guideline, and assuming a similar blended tax rate as in 2011, this projection gives us the following in FY 2015:
|2015 Projection||2015 Low||2015 High|
|Revenue||$ 5,672||$ 6,130|
|Operating Margin||$ 851||$ 1,165|
|Net Income||$ 652||$ 892|
What does a Net Income of $652 million – $892 million mean in terms of the stock price? Depends on what multiple the stock can command in 2015. One has to assume that if the company is able to pull this off, the multiple will expand from the current 7.23. What it will be is any one’s guess. Just for comparison sake, Washington Post stock today sells at a P/E ratio of 24.
We can be conservative and assume a P/E multiple of 10 at the end of 2015. This gives us a market value of $6.52 – $8.92 Billion. It is worth noting that the current market value is $3.6 B. This gives us a range of 16% – 25% annualized return if the company is able to generate revenue growth and margin expansion within the plan.
Further sources of value for the shareholders
For a shareholder, this capital gain is just one source of value. The company also plans to return $1.3 B+ back to the shareholders in the form of dividends and share repurchases. $300 million in share repurchase program has already been announced and the dividend has been raised to $0.80/share (annual). This only gives us a total of $1.06 B, so I assume a further dividend raise or buyback will be announced in the future.
$1.3 B as a percent of the expected average market value in 2011 – 2015 is another 25.7% – 21.7% (or annual average of 5% – 6%) on top of the capital gains due to EPS growth and PE expansion we calculated above.
So overall, we may be looking at 21% – 31% total annual return from the stock, perhaps more, if the market gives the company a higher PE multiple. This of course, depends completely on how successful the management is in implementing its growth strategy.
The Big Question
Companies announce new strategies all the time. A vast majority of the time they fail. Sometimes they succeed. Success is often at varying degrees. So the big question is how much credence can you give to the possibility that Gannett can pull this off?
Quite a bit of success in reaching the goal depends on the starting point. If a company embarks on an ambitious revitalization plan, but is still hamstrung by debt or other legacy issues, it is unlikely to succeed. To Gannett’s credit, it appears that many different trends and factors have confluenced at this time to make this the right time for these changes.
Case in Point #1: The debt is no longer an issue
Gannett spent the better part of the last 3 years paying off its debt and bringing it down to a manageable level. As a result, considerable portion of its FCF went towards repaying debt. Today, the debt burden stands at a manageable 43.1% of the invested capital.
In addition, the debt that remains has been restructured to give it a maturity profile that allows the company flexibility (and capital) it needs to make the necessary changes.
Case in Point #2: External trends are converging
New York Times and Wall Street Journal were first to enact pay walls. Now Gannett. LA Times has announced a pay wall strategy as well. Major media consumers have now gotten used to paying for content at some level and with this practice expanding, it is likely to gain mainstream acceptance.
Further, with the advent of apps on smart phones and tablets, media has found another outlet and a unified digital and print media strategy makes sense. Gannett has an opportunity to bring their broadcast advertisers in the digital fold as well with the additional digital marketing product offering they are introducing.
To me it seems like they are being conservative in estimating the operating margins for the digital segment. They have economies of scale and they can also leverage their existing relationships across the channels. With the digital ad spending trending up, they will probably do much better. No doubt a case for conservatism can be made due to expected competition.
At the lower end of estimated 21% annual return, I think the stock is a compelling value at the current prices. If Gannett is able to do even half of the lower end of the range, their PE multiple will expand to much better than 10 that I have used in my analysis, so I am comfortable with the margin of safety here. Keep in mind that with the bulk of the debt paid off, more FCF will be available for the shareholders and to reinvest in the business. Additionally, with the elections and the Olympics on tap in 2012, the growth in the broadcast and print segments is on a much more solid ground, at least for the next fiscal year.
I recommend the stock be purchased at a price below $17 and held for at least 1 year to confirm that the its strategies are working. If they are, it can be held for a 3- 5 year horizon. My recommended sell price is $32/share in 4 years but this can change if the company hits its targets above the lower range it has planned for.