Earnings Preview: Gannett Co. (GCI)

Gannett Company Inc. (GCI), the publisher of the nation’s biggest-selling daily newspaper, USA Today, is scheduled to release its second-quarter 2010 results on Friday, July 16. The Zacks Consensus Estimate for the quarter is 55 cents a share.

First Quarter Performance

Gannett’s first quarter 2010 results were better than expected, buoyed by effective cost-cutting measures, lower newsprint expense and improved advertising demand. Operating expenses, excluding one-time items, dropped 11.3%.

The quarterly earnings of 50 cents a share surpassed the Zacks Consensus Estimate of 41 cents by 22.0%, and rose twofold over 25 cents posted in the prior-year quarter. On a reported basis, including one-time items, earnings came in at 49 cents a share, up 44.1% from 34 cents delivered in the year-ago quarter.

Management hinted that the advertising environment within the U.S. and the U.K. economies is showing some signs of recovery.

Gannett’s total revenue slipped 4.1% to $1,322.4 million in the quarter — after registering a decline of 14.4% in the top line in fourth-quarter 2009 — helped by strengthening economies and advertising gains related to the Winter Olympic Games.

The rate of fall in publishing advertising revenue has been decelerating since fiscal 2009, and continues to shrink in fiscal 2010 as advertising demand firms. After plunging 17.9% in fourth-quarter 2009, publishing advertising revenue dropped 7.9% to $665.9 million. Publishing circulation revenue also dipped 5.1% to $284.5 million.

The publisher of 83 U.S. daily newspapers, Gannett said that total broadcasting revenue surged 16.7% to $167.5 million. Television revenue jumped 15.4% to $161.3 million.

Digital revenue fell marginally by 1.8% to $140.6 million due to sluggishness in employment advertising demand that affected CareerBuilder’s results, partly offset by a sharp rise in revenue from PointRoll.

Agreement of Analysts

Only one analyst moved the estimate in the upward direction, with no downward movements for either the second quarter or fiscal 2010. This implies that most of the analysts are neutral on the outlook and do not foresee any upward catalyst or downward pressure on the result. A similar trend has been noticed for the third quarter of fiscal 2010. For fiscal 2011, 2 analysts out of 6 have lifted their estimates.

Magnitude of Estimate Revisions

The movement in estimates for next quarter depicts an optimistic outlook of analysts. Over the last 30 days, estimate for second quarter has increased 3 cents, hinting a revival in the auto, strong TV political ad prospects and leaner cost structure. However, for the third quarter, this goes down by 1 cent. For fiscal 2010, no movement in estimates has been made. However, fiscal 2011 again portray positive sentiments of analysts, with a upward estimate revision of 3 cents.

Earnings Surprise

Considering earnings surprises, the stock has been steady over the last four quarters, with positive surprises ranging between a low of 14.29% and a high of 24.32%. The average remained positive at 19.09%. This implies that Gannett has surpassed the Zacks Consensus Estimate by 19.09% over said period.

The upside potential for the estimate in the second quarter, essentially a proxy for future earnings surprises, currently stands at 7.27%.

Our Recommendation

After withstanding the tough economic condition in the last two years, Gannet has emerged as better prepared to combat multiple long-term challenges. In the last two years, Gannett has aggressively lowered its cost, significantly strengthened its balance sheet, lowered long-term debt and developed new businesses. Gannet lowered its operating expenses by 8.9% in the first quarter of fiscal 2010, reflecting continuous efforts of management to reduce cost.

Gannett’s newspaper advertising dropped 28.4% in 2009, but only 7.9% in the first quarter of 2010, revealing signs of recovery in advertising. The pace of revival appears to be much stronger than originally expected, which is typical in an early-stage recovery. Encouragingly, core broadcast advertising is strong heading into the second half, which will benefit from a significant influx of political advertising.

However, higher newsprint costs coupled with a tough comparison for 2011 TV revenues, higher short-term interest costs and pension obligations could limit the growth of the company.

Gannett’s shares maintain a Zacks #1 Rank, which translates into a short-term Strong Buy recommendation. Our long-term recommendation for the stock remains Neutral.

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