Gannett Balances Risk And Reward

Sep.23.11 | About: Gannett Co., (GCI)

The current economic turmoil is taking its toll on publishing companies, and Gannett Company, Inc. (GCI) is no exception. However, the companies are contemplating on finding new revenue generating avenues.

Advertising - An Inherent Risk

Advertising, which remains a significant source of revenue for the company, in turn depends upon the global financial health.

We observe that Gannett’s publishing advertising revenue fell 6.5% during the second quarter of 2011, following a 7.3% drop in the first quarter. Tough macroeconomic conditions along with softness in advertising demand impacted the results.

Advertisers are shying from making any upfront commitments, in an environment where the fear of another possible recession is cropping up. This is quite evident from a revelation made by The New York Times Company (NYT) that its advertising volume for all its print publications and online versions is coming under pressure.

The New York Times Company hinted that its advertising revenue for the third quarter of 2011 would now drop by 8% citing weak advertising spots in real-estate, help-wanted and national automotive at the company's flagship paper,Reuters reported. Earlier, the company had predicted that advertising revenue trends in the third quarter will be similar to the second quarter, when it slid by 4%.

The publisher of The New York Times, the International Herald Tribune and The Boston Globe commented that print advertising is expected to decline 10%, whereas digital advertising revenue would surprisingly drop 2% to 3% during the third quarter.

Diversifying Business Model

Gannett is taking initiatives to diversify its business model and shielding itself against any economic onslaught by adding new revenue streams. The company is also adapting to the changing face of the multiplatform media universe, which currently includes Internet, mobile, social media networks and outdoor video advertising in its fold.

To curb shrinking advertising revenue and seek new revenue avenues, the publishing companies contemplated charging readers for online content. Despite hiccups in the economy, it still promises revenue generation. News International, the subsidiary of News Corporation (NWS), started charging readers for the online content of The Times of London and Sunday Times of London from June 2010.

In March, The New York Times Company launched a pricing system similar to that of the Financial Times' metered system, whereby after browsing a certain number of free articles, readers will be asked to subscribe to enjoy full access to its articles on phones, tablet computers and the Internet.

Plus Points

Gannett witnessed healthy growth across at its core television advertising with higher retransmission fees and digital revenue during the second quarter of 2011. Retransmission revenue climbed 23.7%, whereas digital segment revenue rose 12.6%. Excluding the incremental impact of political spending, the company expects television revenue to rise in the mid single digits in the third quarter.

The company is deploying its operating cash to pay down debt and lower its leverage. The company lowered its long-term debt by $167 million and generated an operating cash flow of $298.1 million and a free cash flow of $180 million in second-quarter 2011. Debt to EBITDA ratio at the end of the quarter was 1.8x, suggesting financial flexibility.

Gannett is also actively managing its capital, returning much of its free cash to shareholders via share buybacks and dividends. The company recently doubled its quarterly dividend to 8 cents a share to be paid on October 3, 2011, and announced the resumption of $1 billion share repurchase program approved on July 25, 2006.

Given the pros and cons, we prefer to maintain our long-term Neutral rating on Gannett. However, counting on the current pulse of the economy and waning advertising revenue, we prefer to have a short-term Sell recommendation on the stock, which is well defined through our Zacks #4 Rank.