Gannett Is Unloved, Out Of Favor And Undervalued

| About: Gannett Co., (GCI)
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Summary

Gannett continues to struggle to turn around its decline in print advertising.

Gannett has been on a huge acquisition spree leaving the company with too many moving parts.

Gannett pays a dividend yield of 6.6% while investors wait for the company to effect its turnaround.

Investment Thesis

Gannett (NYSE:GCI) has been on an acquisition spree as it struggles with declining revenue from print advertising. On a same-store basis, revenue is down 8.6% (excluding revenue from acquisitions).

In 2016 alone, as GCI struggled with declining revenues it attempted to buy in its revenue, by acquiring such companies as, ReachLocal ($163m net of cash acquired), North Jersey Media Group, Inc. ($39m) and Journal Media Group, Inc. ($260m) as well as other smaller acquisitions, leaving the company with so many different parts that it will need time to integrate them all. However, these should in time be accretive to shareholders offering investors at the current price the potential of 50% over the next 18 months.

Business Overview

GCI is media and marketing company. The company is engaged in providing commercial printing, newswire, marketing and data services operations. Its daily publications in the United States include USA TODAY. Surprisingly, Gannett reaches more people digitally than Netflix, CBSNews.com, New York Times Digital, BuzzFeed.com, Huffington Post, and WashingtonPost.com.

Financials

Although GCI's revenue is falling, it is not falling as badly as its stock price would have investors believe, with the share price down 40% over the last year.

While revenue is certainly trending lower, it is gradual and its acquisitions should in time mitigate these declines.

Balance sheet

One aspect I really like about GCI is its very strong financial position. It has brought down its unfunded pension from $612m to $443m (or 28%), which is fantastic and still has $117m in cash and cash equivalents on its balance sheet.

Cost cutting

Management is determined to cut costs but there is little excess fat to be cut in my opinion. It is hoped that through the integration of the recent acquisitions $10m in savings can be found. Cutting back on its workforce is hoped can bring in another $10m in annualized in savings. However, I believe this will make little difference. With capex for 2016 Q4 expected to be around $25m, (annual at roughly $70m), it is very much in line with its average over the last couple of years. The company has not yet guided for 2017.

Digital Advertising Revenues

GCI is working hard to diversify its revenue away from print advertising into digital advertising. However, in the last quarter, excluding all acquisitions, digital advertising was actually down 11.7%.

Insider Purchases & Ownership

Insiders have recently been acquiring stock in the company. Mr. Louis acquired $500k worth of stock at around $8.25 and Ms. Engel acquiring $50k at $7.81. What is particularly noteworthy of these purchases is that Mr. Louis's purchases add to what he already owned (216k shares). So these recent purchases are a significant increase of nearly 45% above his original ownership (and roughly the same again for Ms. Engel; ~40% increase).

DCF Valuation

I confirmed the margin of safety when I performed a back-of-the-envelope DCF analysis with a normalized $230m of FCF (assuming the stop being serial acquires), with 2% growth over the next five years (which is on par with inflation), before leveling off at 1% (which is below inflation). I then discounted this FCF back at 15%. I used 15% (which is very high discount rate) because there is a lot of uncertainty on whether GCI will actually stop doing its acquisition. This brings the DCF to ~$1.7 billion or roughly 50% upside to the current share price, plus a 6.6% dividend yield.

Conclusion

There are a lot of issues surrounding GCI. Least of all is management's inability to adequately allocate capital, opting for empire building rather than repurchasing its own shares. All in all, I think that the negatives I mentioned in the article are already priced and I can see a 50% upside from current prices.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.