Gannett Is Undervalued

The #1 reason Gannett (GCI) has been diminishing in market price is due to GOODWILL. In a business purchase, this represents the excess of amounts paid over the fair value of tangible and other identified intangible assets acquired net of liabilities assumed. It is also the amount of market value items such as brand, reputation, and customer service.

In 2007, before the recession, GCI's Goodwill was valued at $10 Billion. When the recession happened, everything in the market place lost value, which makes perfect sense considering what is and has happened. When people lose their jobs, they lose value that impacts their wallets. Same goes for Goodwill during a recession. When a person loses his job, however, that doesn't mean that he'll never have value as an employee again. Eventually, he'll have another job and the value of his bank account will grow. Same goes for Goodwill. When the market recovers, and it will, the value of a companies brand, reputation, and customer service will be worth more than what it was worth when it experienced macroeconomic difficulties.

In 2007 and previous to 2007, for many years GCI valued its Goodwill at 3.5 times the amount it is currently valued. A couple points to mention why a company would value its Goodwill in 2007 to be $10 Billion and then in 2009 to be $2.8 Billion is A) GAAP accounting law requires a company to value Goodwill on a quarterly basis based off of 'projections' that directly correlate with current economic conditions. So, #1 they are forced to do it. B) the company receives a substantial tax benefit by depreciating the value and claiming an income tax loss. So, #2 they want to do it because they benefit from it.

Before the recession and for many years previous to the recession, the Goodwill value was between $9 and $10 Billion. If we added that Goodwill back into the assets of the business, here is what the Book Value of the firm would, and in my opinion should, look like:

• Full Year ending Dec. 2007: $39.26 per share (before Goodwill was written down).
• Full Year ending Dec. 2008: $36.94 per share (after Goodwill was written down 5X less than 2007).
• Quarter Report March 2009: $36.59 per share
• Quarter Report June 2009: $36.95 per share

The Book Value of GCI reported by the company for the period, June 2009 was: $6.43 per share.

I propose, based off of more information than just this, that the TRUE Book Value of GCI is $36.95. I believe the Intrinsic Value of GCI is much higher; around $65 per share.

By identifying the cause, defining the cause, the reasons for the cause, and the benefits to the company, we can quickly see that indeed we are holding a position in a company that is going to pay off tremendously for us in the future.

After researching 10 years of annual reports, I can tell you with 100% certainty, the decline in market price has nothing to do with how this company is being operated nor does it have anything to do with the overall bottom line.

Comments

[Short Bus:]

delusional with 100% certainty

Based on fact A, I can infer fact B, and then derive from that, fact C. Which based on fact C, I can guarantee that fact D is 100% correct.

quod erat demonstrandum

Nov 01 04:16 PM

[Value Inves...:]

If you completely take away Goodwill from their balance sheet, the way Warren Buffett has suggested doing, the company operates itself with very little difference than it has in previous years.


On Nov 01 04:16 PM Short Bus wrote:

> delusional with 100% certainty
>
> Based on fact A, I can infer fact B, and then derive from that, fact
> C. Which based on fact C, I can guarantee that fact D is 100% correct.
>
>
> quod erat demonstrandum

Nov 01 04:25 PM

[casey00001:]

If Gannett was worth anything, Rupert Murdoch would have already bought it.

Nov 01 06:18 PM

[Chimin Sang:]

I don't think you get the accounting right. A company DOES NOT gain tax benefit by writing down goodwill.

If there were such a rule, all companies would like to exercise their 'right judgement' to write down goodwill to gain tax benefit. This would be a wrong incentive IRS send out to the companies. Of course, I know the rule by fact. I am giving you a scenario to show the absurdness of such a rule.

Nov 01 07:32 PM

[Value Inves...:]

Mr. Sang. You and I disagree strongly. If I can show a Net Loss on my bottom line, I have a tax advantage in doing so.

You are clearly mistaken to say that a corporation or an individual does not receive a tax benefit by showing a Net Loss. I know this from a first hand business perspective.


On Nov 01 07:32 PM Chimin Sang wrote:

> I don't think you get the accounting right. A company DOES NOT gain
> tax benefit by writing down goodwill.
>
> If there were such a rule, all companies would like to exercise their
> 'right judgement' to write down goodwill to gain tax benefit. This
> would be a wrong incentive IRS send out to the companies. Of course,
> I know the rule by fact. I am giving you a scenario to show the absurdness
> of such a rule.

Nov 02 04:12 PM

[Value Inves...:]

A quick calculation (numbers I'm using in example have nothing to do with GCI's actual financial statement):

If a company who earned $10 Million after COGS took an impairment charge of $5 Million due to short term 'projected' goodwill asset value, and that company operated at the 38% tax bracket, then the following is true:

Operating Income: $5 Million
Taxes: $1.9 Million
Net Income: $3.10 Million

Same situation excluding the impairment charge:

Operating Income: $10 Million
Taxes: $3.8 Million
Net Income: $6.20 Million

The difference between not having an impairment and having an impairment is a difference of $1.9 Million in taxes and $3.10 Million to the bottom line, or 100% in the favor of having an impairment.

Therefore, it is clearly in the best interest of a company to have an impairment charge, especially one in which no actual cash is being exchanged such is the case with GCI; rather, its a complete 'projection'.

And yes, companies do this ALL the time. You may have not have noticed it before because the majority of investors do not read the entire SEC filings. That is a fact.

Nov 02 04:25 PM

[Value Inves...:]

Gannett has been around since 1906. Much longer than Mr. Murdoch.


On Nov 01 06:18 PM casey00001 wrote:

> If Gannett was worth anything, Rupert Murdoch would have already
> bought it.

Nov 02 04:42 PM