The #1 reason Gannett (NYSE: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.