We typically shy away from large, or even mid caps; the fact remains that they already get a great deal of coverage, and in our minds, they just aren't typically as interesting as the nano/micro cap markets.
That being said, over the past several months, we've been intrigued by some larger names that were all but written off for dead. Some appeared to be trading like cheap call options. Foremost on this list is publishing powerhouse Gannett (GCI), parent of the 2.1 million daily circulation USA Today.
Stung by a deep advertising slump, and declining newspaper circulation S&P 500 member Gannett fell to $1.95 last March. This was a $30 stock one year earlier, and topped out in the $90 range in 2004.
But advertising slumps can be brutal, and this was perhaps one of the worst on record. I lived through the last one in 2001-2002 as senior markets editor and writer for Bloomberg Personal Finance Magazine. I was perhaps naive to the ways of the publishing world, having jettisoned a management career at Bloomberg to enter a whole new world.
As advertising worsened, Bloomberg Personal got thinner in terms of page count. Already losing money on the 400,000 circulation magazine, and with new management in place following Mike Bloomberg's election as New York City Mayor, the company pulled the plug on Bloomberg Personal. That's a day I'll never forget; I'm sure the publising veterans among the crowd called into the conference room for the announcement knew what was happening, but I certainly didn't. Ironically, the upcoming issue of Bloomberg Personal was finished, and I had the cover story for a magazine that was never released. I digress.
What attracted us to Gannett was the option-like price (the bulk of the position taken in July, at $3.13), for a company that we believed would survive. Perhaps it would never see $90 again, but at $3 and change it looked like a steal. So far, this appears to be a classic case of Mr. Market throwing the baby out with the bath water.
Gannet closed at $12.89 yesterday. Smarter investors might trim their position here, we have not...yet, anyway. Last week, company guidance suggested earnings of $.39- $.42 for Q3, versus consensus estimates of $.29. Full year 2010 consensus estimates are calling for $1.52 a share, so GCI currently trades at about 8 times forward earnings. Certainly not as cheap as it was a few months back, but still an interesting turn-around story.
We were concerned with Gannett's debt levels, currently around $4 billion in long-term debt with the completion of this week's senior note offering, but the company has paid down a line of credit, pushing mnaturities into the future. This has at least bought the company some time.
Trailing twelve month earnings have painted a bleak picture, with the company losing $4.4 billion, or $19.32 per share. However, that includes more than $5.5 billion in non-cash charges, and Gannett has actually generated nearly $2.00 in free cash flow during that period.
The publishing world may never return to "normal", but we believe that Gannett, with more than 80 daily newspapers, 700 non-daily publications, 23 television stations, and a website that draws more than 20 million visitors per month, is a best of breed in the space.
- Ticker: GCI
- Price: $12.62
- Market Cap: $2.96 billion
- Cash: $104 million
- Estimated Enterprise Value (EV): $6.4 billion
- EV/EBITDA: 5.2
- Price/Sales: .48
- TTM FCF/share: $1.97
- 2010 Est EPS (consensus): $1.52
- Forward PE: 8.3
- Yield: 1.4%
Disclosure: The author has a position in Gannett(GCI). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.