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Gannett Co. (NYSE:GCI) is up 15% since our buy recommendation in early September, based on the management's commitment to return $1.3 billion to shareholders by 2015, and due to new initiatives taken by the company to increase profitability (digital marketing, all access content subscription etc). The company beat analyst estimates for both revenues and EPS for Q32012. We reiterate our buy recommendation based on the return that shareholders can expect (through dividends and share repurchase) from the company, as well as the fact that the broadcasting and digital businesses will drive future growth.

Q32012 performance:

The company has three segments: publishing, broadcasting and digital. Revenues for the company rose by 3% with gains from all segments, except the "publishing advertising" part of the publishing segment. The decline in revenues from advertising was 6.6%, which is still less than last year's Q3 decline of 8.5%. Revamping and re-launching of the company's main newspaper, the USA Today, in September, might attract more advertisers in the future. Publishing circulation revenues improved by 5.6% as compared to a 1% drop last year. Circulation revenues continued to benefit from the success of all access subscription for content, which is now present in 71 markets. Broadcasting segment revenues showed the biggest jump with an increase of 36%, versus a decline of almost 6% last year, due to bigger Olympic spending given the localized sales effort, stronger ratings and political spending. Digital initiatives (now forming 25% of revenues) are a significant driver of growth, with a 4.7% increase in revenues. The company's website, CareerBuilder, continues to receive an outstanding response from consumers.

Overall, the company posted revenues of $1.31 billion, while analysts were expecting $1.29 billion. A year ago, revenues were $1.27 billion for Q3.

Q3 EPS of $0.56 also beat analyst consensus estimates of $0.53. Year ago EPS was $0.44, which means an increase of 36% YoY. This is the fourth consecutive quarter in which the company has beaten analyst estimates for EPS.

Other financial analysis

More than half of the $300 million share repurchase program announced in Q1 (that has to be competed in the next two years) is still left. The YTD repurchases amount is $116.5 million, or 2.8% of the current market cap. The remaining amount under the repurchase authorization is approximately 4.4% of the current market cap.

The company has a dividend yield of 4.5% with a free cash flow yield of 13%. The dividend is sustainable and well supported by earnings, with a payout ratio of 33%. For more details of dividend sustainability, click here.

The short ratio for GCI has reduced from 6.8 days as of September 2012 to 4.3 days now, indicating that investors are more bullish on the company now, and some of the recent stock price appreciation might have been due to investors covering their short positions.

Valuation:

The company has a forward P/E of 8x as compared to peers like the New York Times' (NYSE:NYT) 16x and The McClatchy Company's (NYSE:MNI) 5x. GCI has higher profit margins (trailing twelve months) as compared to both above-mentioned peers.

At a forward P/E of 8x (which is also the 5-year average P/E for the company) and analyst EPS estimates of $2.2, the share price comes out to be almost $18. We think there is room for expansion in the multiple, as more promising results come in the coming quarters. We recommend a long position in GCI.

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