Several months ago I wrote a positive article about Gannett (GCI) assessing an approximately $14 price target. Since then we have reassessed our models, made some adjustments, and taken into consideration the recent earnings GCI has posted.
We have moved GCI from our “Buy” list to our “Sell” list for the following reasons. Total revenue from a year earlier is down 3.5% as ad spending and publications continue to be in a negative trend. As firms switch to digital platforms and more mobile advertising Gannett will struggle to maintain its industry dominance. The truth of the matter is that over a long-term investment horizon, Gannett is offering products that will be obsolete in the future.
Publication circulation revenues have fallen about 3% for the first 6 months of 2011, while ad revenue has been reduced by 6%. Our view of a low growth environment for the current foreseeable future reinforces our belief that in uncertain times, companies are less likely to spend frivolously on ads and marketing. GCI Selling/General expenses have increased to $295M from a year previous, but have not generated additional revenue. GCI EPS is down 17% from a year earlier.
Gannett has a staggering amount of debt: $2B in long-term debt and another $1B in pension and healthcare for employees. Its robust cash flow production is the only real positive for the firm. The first problem is that with such expansive debt and declining revenues, GCI will likely have to be conservative on its dividend to help pay down debt. The second problem with the cash flow is that one of its main drivers of revenue, the publication USA Today, is down from around 2.3M subscribers in 2008 to 1.8M in 2010. That decrease of around 20% should be enough to show you that GCI will be struggling to maintain its earnings in the future.
Many investors have been looking to GCI to benefit from political ad spending. It should be known that the growing trend of mobile and online advertising is probably better slated to capture most of that ad spending. Our conclusion is that GCI is stuck between a rock and a hard place. The fundamentals are clearly beginning to break down. We believe that over a 3- to 5-year period, this company is going to be cutting dividends, which will in turn force the stock price to suffer significantly.