Gannett Corp. (NYSE: GCI) has had a challenging year. The company, which has been on a buying spree, saw its stock underperform the market and the media sector, as shown below. The company's planned acquisition of Tronc (NASDAQ: TRNC) failed after lenders pulled out of the deal. The deal was intended to help Gannett penetrate the big cities like Chicago and Los Angeles.
Yesterday, the company released its 4Q'16 report, which beat analysts' forecasts. EPS was $0.50 beating forecasts by $0.08 while revenues of $867 million beat estimates by $19.67. The company's earnings were enhanced by acquisitions the company made during the year. On an adjusted basis that excludes the acquisitions, the company's revenues declined 7.7%.
In this article, I will look at the reasons I believe Gannett is a buy at the current price. My thesis is based on the company's valuation, dividend yield, and the management's guidance.
Gannett is America's largest newspaper company by circulation. The company owns USA Today, 109 local media organizations in the United States and 150 brands in the United Kingdom. The company has more than 4 million daily circulation and 3.9 million Sunday circulation. GCI delivers its content using different mediums such as mobile applications, websites, and print. The company grows organically and through strategic acquisitions. Last year, key acquisitions included ReachLocal, North Jersey Media Group, and Journal Group. In a very challenging newspaper environment, the company intends to grow using the following strategies.
Summary of earnings
In the recent quarter, GCI reported operating revenues of $867 million, up $128 million from the previous same quarter. This growth was attributed to the acquisitions mentioned above and increased momentum in digital advertising which was up 19.1%. Net income was $24.6 million. In the publishing segment, operating revenues were $790.4 million, up 7.5% from the same quarter in the previous year. These revenues were boosted by the acquisitions. In digital advertising, revenues of $110.8 million were up 14.4% compared to the prior year quarter. The increase was attributed to acquisitions, growth of USA today, and improved local performance. Operating revenues of the ReachLocal segment were $75.2 million and adjusted EBITDA of $0.9 million.
The table below shows the company's operating revenues by segment.
Source. Seeking Alpha
Apart from acquisitions, the company's growth was attributed to improvement in digital subscriptions and revenues. In the quarter, digital-only subscribers reached 182,000 which was up 26% compared to the same period in 2015. Digital-only plus Sunday subscriptions went up 62% from the past year. In the United Kingdom, Newsquest's digital subscribers also increased "substantially." Obviously, part of this growth was attributed to the general election.
The table below shows the company's publishing revenues.
Source: Seeking Alpha
The newspaper industry continues to face a number of challenges with print revenues declining across the board. Several newspapers outlets such as Tampa Tribune and Pittsburg Tribune Review have shut down. Others such as New York Times, Wall Street Journal, and Tronc have been forced to reduce their workforce and restructure. Last year, Gannett fired 2% of its workforce as well. A list of some of the shutdown newspapers can be found here.
With declining print subscribers and ad revenues, newspapers are pivoting to digital. In digital, they are competing amongst themselves and among digital-only media houses such as BuzzFeed, Vice, and Huffington Post. They also compete with social media giants like Twitter (NASDAQ: TWTR), Facebook (NASDAQ: FB), and Snapchat (Private: CHAT).
As mentioned above, GCI's subscribers increased in the last quarter. This was expected as it was during an election period with many people getting in to get detailed information. GCI's competitive advantage is in the local areas not spotlighted a lot by the mainstream media. The company operates leading newspapers in small towns in 34 states. This focus on small areas is an added advantage, especially for companies that want to reach these residents.
Gannett as an investment
In the past year, Gannett's stock price has underperformed the media industry and the market in general. This was as a result of the company's revenue and subscriber decline. The company had numerous misses in the year as shown below. Also, as mentioned above, traditional media houses are facing an industry-wide challenge of adopting to the new digital normal.
Source: Seeking Alpha
Yesterday, the company's stock price gained 4% after the company beat the analyst forecasts. In the past 52 weeks, the stock lost 41% of its value. While yesterday's results were encouraging, I was concerned that the results were driven by the recent acquisitions. Organic growth before the acquisitions declined in most categories. Same-store operating revenues declined by 7.7%.
At the current price of $9.05, the company has a market capitalization of $1.01 billion and an enterprise value of $1.283 billion. The company's forward 1-year ratio of 7.947 is lower than its competitors such as New York Times (NYSE: NYT) which has 27.23 and Time (NYSE: TIME) which has 15.05. The trailing PE ratio of 28.31 is slightly lower than the industrial average. Based on the future earnings multiple and with the company currently trading near the 5-time low, I believe the company is undervalued. The stock price is below the future cash flow value as shown below.
Source. Simply Wall Street
For dividend investors, the company has an attractive dividend yield of 7.36% which is relatively high in all standards. The Dividend Advantage Rating System (DARS) system by dividend.com ranks GCI's dividends at 3.4 compared with 3.2 in the services industry. The table below shows the company's dividend growth rate in the past five years.
While the company has an attractive dividend yield, the company has a dividend payout ratio of 234%. This means the funds the company is using the dividends are not covered by the net profit. However, as shown below, in the next three years, based on estimates, it is expected that the dividends will be covered by the net profit.
Source. Safe Wall Street
Gannett, which has had a relatively bad year reported encouraging earnings boosted by its recent acquisitions. Total digital subscribers increased to 225,000. The stock price is currently near the 5-year low and the stock is currently trading at a 50% discount to the future cash flow value. It is also trading at a discount compared to its closest peers. The company also has an attractive dividend yield of 7.36% that is expected to be covered by the net income in the next three years. Therefore, I believe the company is an attractive buy at the current price. However, future growth will be impacted by how the company and its advertisers adopt to the digital age.
Disclosure: I am/we are long GCI.
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.
Additional disclosure: Crispus Nyaga is a Wall Street writer focusing on companies in different sectors. While most of my recommendations have turned out well, some have not been quite successful. Therefore, before you buy or short a company, I recommend that you do your own independent research. Also, I am not a native English Speaker so kindly excuse any grammar and spelling mistakes. I do my best to publish on a regular basis. So, kindly follow me to receive instant updates when I publish.