Saying that Gannett (NYSE:GCI) is a newspaper publisher might cause investors to lose interest as investing in newspapers are nowhere near as prosperous as they once were. Back in his heyday, Buffett (NYSE:BRK.A)(NYSE:BRK.B) made a fortune investing in the Washington Post, buying it in 1973 and selling it to Jeff Bezos in 2013 (I have aptly chosen to anchor the link to none other than USA TODAY, which Gannett owns).
But is there still money to be made in owning newspapers; in particular, is there money still to be made from owning Gannett? After writing an article on 10 January 2017, I have spent a significant amount of time thinking about Gannet's potential and I'm now changing my opinion.
When the facts change, I change my mind. What do you do, sir?
John Maynard Keynes
When I wrote my previous article on Gannett, I was surprised that Gannett reaches more people digitally than Netflix, CBSNews.com, New York Times Digital, BuzzFeed.com, Huffington Post, and WashingtonPost.com.
Gannett's future hopes rely on it being able to monetize local news. Because, in spite of it making a valiant effort to increase its papers' circulation, which it has done and is up 0.3% on a same-store circulation basis in 2016 Q4 versus 2015 Q5, the sad truth is that news is old news by the time you read it in the national paper such as USA TODAY.
As the company points out in its 10-K,
The media industry continues to be affected by demographic shifts, with traditional print newspaper readers getting older and younger generations developing the habit of consuming news through digital media [...]
Think about it, who actually has time to read a full newspaper on a weekly basis? Not to mention on a daily basis? A supermarket where I live gives out for free a choice of high quality newspaper if you spend a nominal amount in store. Shoppers do not take them, even for free.
Gannet's management obviously understands the headwinds a national newspaper faces and has attempted to tackle this by acquiring ReachLocal ($156m).
ReachLocal helps local businesses advertise online. It is an interesting business idea, but as a traditional value investor, I find the business too young to estimate its intrinsic value.
For the 3 months ending 25 December 2016, it had an adjusted EBITDA of approximately $0.9m and revenues of $75m. Gannet has not had the business for very long and is still in the process of integrating it. But looking back to when it operated as a standalone business, it also had a very small operating margin and more often than not it made a loss. The reason it makes such slim margins (in good years) is because the costs of online media acquired from third-party publishers is too high.
Having said that, reading about local developments in your local area is not only worthwhile, it is certainly not time-pressed. For instance, readers would be more than happy to pay a few bucks to read about how their children's school recital was perceived in their local community, last week.
In my opinion, there is money to be made from ReachLocal. However, my argument is that acquiring Gannett for ReachLocal is not a wise investment at the price Gannet trades at (approximately $920m).
My faulting DCF assumption
In my previous article, I had a faulty intrinsic value calculation. I was working off the assumption that Gannet would generate normalized FCF of $231m.
However, after spending quite some time over the past month thinking about Gannet, I suspect this number is erroneous and too elevated.
The company has given 2017 full year guidance. Capital expenditure will be higher than in its recent past, ranging from $65m to $75m. And adjusted EBITDA is expected to range from $325m to $335m compared with $350m in FY 2016 and $392m in FY 2015.
I reverse my previous opinion that an investment in Gannett has the necessary margin of safety. Consumer habits are changing and I suspect that paying for a national newspaper on a daily or even weekly basis could become less common in time. The possibility of the permanent loss of capital more than offsets Gannet's 7.9% dividend yield.
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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.