Please Unlock Gannett's Value

Jun. 02, 2022 1:20 PM ETGannett Co., Inc. (GCI)LEE, NYT55 Comments6 Likes

Summary

  • Steady improvement from an operational standpoint over the past two years has not translated into stock price performance.
  • I think the blame falls on the shoulders of a management team that has failed to communicate effectively with Wall Street and investors.
  • The shares remain extremely inexpensive, and it is time for management to take the steps necessary to unlock Gannett's value.
  • This idea was discussed in more depth with members of my private investing community, The Portfolio Architect. Learn More »

Gannett Offers To Acquire Tribune Publishing In Deal Valued Over $800 Million

Mark Wilson/Getty Images News

Before I dig into why I think this stock is not performing, let me first review what has been going right. From an operational standpoint, the company has shown steady and consistent improvement since New Media Investment Group acquired Gannett (NYSE:GCI) more than two years ago and retained its name to form the largest newspaper owner in the United States. The management team, led by CEO Mike Reed, has improved the fundamentals on every metric.

  • Achieved $325 million in cost savings since completing the merger
  • Reduced debt outstanding by approximately $388 million to $1.371 billion
  • Reduced the cost of remaining debt from 11.5% to 5.8%
  • Increased digital revenue as a percentage of overall revenue from 25% to 33.6%

The increase in digital revenue is at the core of the company’s strategy to transform from a traditional print media operation to a subscription-led and digitally-focused media and marketing solutions company. It has resulted in higher margins, tremendous free-cash flow, and a return to profitability. Every quarter the company pays down more debt, grows digital revenue, sells non-core assets, and moves closer to the inflection point when it returns to overall revenue growth, which it should realize by year end.

The majority of revenue still comes from the legacy print business with its 1.8 million subscribers in 136 markets across the country. This business continues to be profitable and generate a tremendous amount of cash, which is used to fund growth of the digital enterprise, but it is a gradually shrinking for obvious reasons and needs to be transitioned to the digital model. It accounts for approximately $2 billion of Gannett’s $3 billion in annualized revenue.

On the digital front, Gannett has amassed 1.75 million subscribers, which it intends to increase to 6 million by 2025, as it continues to test and roll out new product offerings, including its flagship publication known as USA Today. It shops for potential subscribers from the 191 million average monthly visitors to its various sites by obtaining email contact information (7 million) and converting those contacts into registered users (4 million) who will hopefully become paying subscribers (1.75 million). The 11 million contacts and registered users it has so far are the warm leads, but it is also working to covert the 1.8 million print subscribers to digital subs as well. This business is now generating over $120 million in annualized revenue on subscriptions alone, while digital advertising revenue is approaching $400 million.

The other half of the company’s digital revenues comes from a hardly known operation called Digital Marketing Solutions (DMS), which has nothing to do with the newspaper business, yet it could be the crown jewel within the entire company. DMS is a cloud-based platform of products serving more than 15,000 small-to-medium sizes businesses (SMB) with everything from A to Z that a company needs to build, market, manage, analyze, and grow its online presence. It operates under a software-as-a-service (SaaS) model with customers working with sales and service reps to select products from the suite that will help them grow.

Q1 earnings presentation

Gannett

DMS has a new strategy that incorporates a “freemium product” similar to other SaaS companies, whereby it offers several scaled down and do-it-yourself products for free to SMBs with digital marketing budgets of less than $12,000/year. This should result in a significant increase in new customers, but with minimal acquisition costs. A percentage of these freemium customers will inevitably upgrade to more sophisticated products in the suite that generate revenue as they grow.

DMS is producing approximately $450 million in annualized recurring revenue, which is growing double digits along with its customer count and generating approximately $50 million in EBITDA. Management noted in a presentation earlier this month that competitors are valued at 5-10 times sales. Even if we knock that down to 4-times sales, DMS would have a market value of $1.8 billion, which is more than three times the market cap of Gannett at $550 million and nearly equal to its enterprise value of $1.9 billion. That is why this is now the crown jewel of the company.

Lastly, Gannett’s events business operates under USA Today Network Ventures and hosts a variety of special events and endurance races across the country for hundreds of thousands of participants. It is a very high margin and profitable business that was completely shut down during the pandemic, but its back! In the first quarter there were 25 in-person events with 115,000 in attendance producing $11.7 million in revenue. This segment of Gannett should continue to scale as we return to a post-pandemic new normal.

Gannett’s foray into online gambling through its partnership with Tipico is icing on the cake, but other than the $20 million per year in advertising revenue that the relationship produces, there isn’t much to talk about now. This is because the rollout of online sportsbooks across the country has been moving at a snail’s pace with Tipico up and running in just Colorado and New Jersey, while Ohio, Indiana, and Iowa are on tap and awaiting regulatory approval.

Therefore, we have a company with approximately $1 billion in digital revenues that is growing high single-digits and approximately $2 billion in print revenues that is shrinking low single-digits, resulting in what should be flat revenues in 2022. That said, the improvement in margins from cost cutting, debt reduction, debt refinancing, and digital revenue growth is expected to result in $50-70 million of net income, which by my calculations approximates $0.45 in earnings per share in 2022.

More importantly, management is forecasting a 40% compounding annual growth rate in free cash flow from the $88 million that was generated last year through 2025. That equates to ($88 + $123 + $172 + $240 + $336) $959 million in cash, which could be conservative considering management is guiding to $170 million in free cash flow this year. Regardless, this free cash could retire all of the company’s outstanding debt ($882 million), assuming the $485.3 million in 6% notes due in 2027 convert to approximately 97 million additional common shares.

balance sheet

Gannett

If we use a very reasonable multiple of 15x the expected free cash flow of $336 million in 2025, we have a $5 billion market cap. Assuming the company is debt free and the share count rises from approximately 140 million to 240 million (2027 Note convert at $5), that equates to a stock north of $20/share. With a company that has a highly probable and very clear fundamental path to a stock that should be worth more than $20/share over the next 36 months, why is it trading under $4 today? In other words, with so much going right for Gannett, how could its stock price be so wrong?

I suppose we could blame the market for Gannett’s poor stock performance, but that is not a legitimate excuse, especially over the past several months. I view performance from the date of my initial investment at approximately $6/share at the beginning of 2020, which was also the first full year following the merger. The shares have significantly underperformed both the Russell 2000 index and the Vanguard Russell 2000 Value ETF (VTWV), which are respectively up 15% and 25% compared to Gannett’s 38% decline. Adding to my position at $1-2/share during the pandemic-induced lows of the bear market in 2020 allowed me to lower my cost basis dramatically, but 2022 has eroded much of those gains.

GCI performance

Stockcharts

When we compare Gannett’s performance to its largest and smallest competitors we see the same thing—underperformance. Over the same time frame, the New York Times (NYT) is up 8% and Lee Enterprises (LEE) is up 52% compared to Gannett’s decline of 38%. The decline is even more pronounced when we recognize that Gannett’s valuation is substantially less than both Lee and the New York Times.

GCI performance

Stockcharts

Unfortunately, I think the blame clearly falls on the shoulders of a management team that has communicated poorly with investors and Wall Street, as well as more recently sent mixed messages that don’t instill confidence. That is a better problem to have than a deterioration in the fundamentals, but it needs to be resolved to see the stock recover. Good stock performance begets good stock performance in the same way bad begets bad. It is time to turn the tide.

In all seriousness, management should consider hiring its own digital marketing solutions division to figure out how to better market their own publicly-traded stock. During an earnings conference call last summer, I asked CEO Mike Reed to explain why Wall Street had a consensus sell rating on his stock. As rare as sell recommendations are on the Street, this was stunning. He assured me that he was working on it, but evidently to no avail. No one recommends buying these shares today, which would help broaden the shareholder base, increase trading volume, and bring more stability to the stock price. This is a $2 billion company with $3 billion in revenue and a household name that has been around for more than a century. It should not be that difficult to sell an investment story that basically sells itself. Analyst coverage will not matter in the long term if the company continues to execute, but it has certainly hindered price performance over the past two years.

A lack of communication last year became miscommunication earlier this year with what I construed to be mixed messages. When presenting at the Needham Virtual Growth Conference in January, CEO Reed discussed selling or spinning off the DMS business at some point later this year in order to realize its fair market value, which he estimated to be between 4-8x sales. I think that set a false expectation with some investors because there was no mention of it again. Granted, the market environment for such a transaction is more difficult today, but if its suggestion was for nothing more than optics, it doesn’t breed confidence.

Speaking of optics, at the beginning of February with the stock trading at approximately $5/share the company announced a $100 million share repurchase program, which equates to nearly 18% of the market cap today. Unsurprisingly, the stock surged on the news and rallied over the following two weeks to a high for the year of $6.38. At the end of February, the company reported fourth-quarter earnings below expectations and provided soft guidance for 2022 due to higher expenses and an increase in capital spending. The shares plunged to a 52-week low of $4.23. Surely, management was capitalizing on this opportunity to buy back as many shares as possible after the stock price collapsed.

Gannett

Stockcharts

Unfortunately, that turned out not to be the case when management informed investors three months later during its latest earnings call that not a single share had been repurchased due to a “short trading window,” without much explanation beyond that.

In response to a question during the call from Leon Cooperman of Omega Advisors, who noted that the stock seemed “very underpriced” and asked if management would spend the $100 million this year to reduce the share count by approximately 15%, CFO Doug Horne indicated that debt repayment was the first priority, followed by liquidity and investing in the business. Lastly, he indicated that they would be “opportunistic” when they believe their share price is trading below fair value. CEO Mike Reed was quick to follow up and assert that the share repurchase plan is “not optics, it’s not promotional,” and that they would take advantage of the opportunities when the share price is significantly mispriced.

First of all, the share price is and has been mispriced for a very long time, but management didn’t indicate that on the call, which was extremely disappointing. If you announce a $100 million buyback representing 15% of your float at $5/share, it assumes that you think $5 is undervalued. If the share price falls 20% to $4, as it did on the day of the call, it is extremely undervalued. There is no need to be opportunistic when the opportunity is sitting in your lap day after day.

Secondly, it would be nice to have the CEO and CFO on the same page during the conference call in terms of the capital allocation strategy. That did not appear to be the case. The CFO clearly wants to continue paying down debt, but when your stock is arguably trading at a less expensive valuation, you buy back shares. That is in the best interest of shareholders today, which does not seem to register with the management team. In fact, paying down debt over the past two years has done nothing to enhance the valuation of the stock, which continues to decline to levels not seen since the beginning of 2021.

Additionally, when you have $152 million in cash on the balance sheet, reiterate guidance for $160-180 million in free cash flow this year, and increase guidance for asset sales to $50 million through the remainder of the year, spending $100 million to buy back your stock at the current price is not going it impair your liquidity. This is especially true when your creditor is lending you an additionally $50 million to do so.

Ten days after the earnings call, management presented at the Needham Technology & Media Conference and informed investors in a filing that 800,000 shares had been repurchased at an average price of $3.82. That works out to be approximately 100,000 share per day, which is a start, but well below the daily maximum allowed. It is difficult to discern if that was for optics during the presentation at Needham or the beginning of an aggressive daily repurchase program to take advantage of the stock trading at a 17-month low. I hope it is the latter, but we won’t know until the next earnings report in August.

While these missteps by management haven’t done any favors for shareholders, the fundamental story is intact and continues to improve. Therefore, this continues to be one of the most undervalued stocks in the marketplace, and the upside is tremendous. I can’t find another name with such modest downside risk that has the potential to quintuple the value of my investment today over the next three years.

Lots of services offer investment ideas, but few offer a comprehensive top-down investment strategy that helps you tactically shift your asset allocation between offense and defense. That is how The Portfolio Architect compliments other services that focus on the bottom-ups security analysis of REITs, CEFs, ETFs, dividend-paying stocks and other securities.  

This article was written by

Lawrence Fuller profile picture
11.57K Followers
A foundation, framework and discipline for optimizing portfolio performance

Lawrence is the publisher of The Portfolio Architect. He has more than 25 years of experience managing portfolios for individual investors. He began his career as a Financial Consultant in 1993 with Merrill Lynch and worked in the same capacity for several other Wall Street firms before realizing his long-term goal of complete independence when he founded Fuller Asset Management. He graduated from the University of North Carolina at Chapel Hill with a B.A. in Political Science in 1992.

Follow

Disclosure: I/we have a beneficial long position in the shares of GCI either through stock ownership, options, or other derivatives. 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: Lawrence Fuller is the Managing Director of Fuller Asset Management, a Registered Investment Adviser. This post is for informational purposes only. There are risks involved with investing including loss of principal. Lawrence Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Fuller Asset Management. There is no guarantee that the goals of the strategies discussed by will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security.

Recommended For You

Comments (55)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.