Gannett (GCI) appears to be an unloved "newspaper" stock in the out of favor publishing sector. However, the company generates too much recurring cash to ignore. Rarely are 20%+ free cash flow yields and low payout ratios accompanying anything other than a rapidly declining business with lots of debt. We were pleasantly surprised to learn that the cash flows from the business are not diminishing rapidly, but in fact are relatively stable with a chance to grow. Furthermore, Gannet has low leverage with debt to cash flows of only 1.9x as management continues to take an ultra cautious approach to the balance sheet using cash to reduce debt. Accordingly, we view the equity as very attractive currently trading around $15/share. Even in a scenario where shareholders have to wait three years for all debt to be paid before management begins returning capital to shareholders, shareholders will eventually be receive the large amounts of cash generated from the business from then on out. However shareholders are unlikely to have to remain so patient, as management indicated a fresh willingness on Gannett’s first quarter conference call to returning capital to shareholders though share buybacks or an increased dividend. Also, management would likely want to maintain a decent level of debt to avoid enticing a leveraged buyout.
Gannett operates as a media company across three business segments. It’s a newspaper company, a TV company, and a digital company. As the newsprint sector continues to struggle with the secular decline in the industry as well as the recent recession so has Gannett’s publishing business which is comprised of USA today (~10%), U.K. papers (~10%), and a variety of local newspapers across the USA (~80%). This business remains Gannett’s largest revenue segment and consequently has weighed on the company’s sales growth and financial performance. Gannett’s broadcast business consists of over twenty TV stations around the United States and generates about a third of the operating income for the company and has been posting solid results. The digital business includes the company’s interests in CareerBuilder.com, Classified Ventures, and other online sites and is only about 10% of operating income today but is growing rapidly and contributing an ever larger share to the top and bottom lines.
Gannett just posted first quarter results for 2011 in line with what they had guided investors towards a few weeks ago at a media & entertainment presentation. Publishing was weak (revenues down 6% y/y) with Newsquest (U.K. papers) posting the largest declines (-12%), broadcasting was good given tough year over year comparisons (down 2%), and digital showed strong progress (+12%).
With debt levels well under the company’s debt covenant of 3.5x cash flow we see no reason Gannett couldn’t pay out 85% of the $800 million it generates in free cash flow annually, which even at an 87% higher stock price of $28 would provide a dividend yield of 10%.