The publisher of USA Today and many other publications reported second quarter results this morning that easily topped estimate. Gannett Co. (GCI) was expected to post earnings per share of $.36, but the actual results came in 10 cents ahead of those projections. Gannett has not beaten estimates by this wide margin in quite some time. Revenue was slightly lower than expected; sales slumped to $1.41 billion or a decline of 18% from a year ago. In addition, the company also revised an earlier write-down upward, and this combined with the earnings beat propelled the stock higher by nearly 30%. Make no mistake, the problems in the newspaper industry are real and quite serious. However, for Gannett much of the possible bad news has already been priced in, as GCI came into the day trading for less than 3x expected earnings for this fiscal year.
Gannett was sent reeling in the current economy as demand for advertising has fallen significantly, in the last period ad revenue declined 32% from a year ago. Furthermore, subscriptions revenue has declined as many consumers are now turning for free information via the internet. Magazines have been shutting down and being sold, most recently with McGraw-Hill (MHP) putting Business Week on the selling block. There is no doubt that these are troubling days for print media, and these companies were unprepared for the challenges of the internet age. However, if you believe that–either through micro-payments or a general rebound in the economy–print media will survive, then Gannett is priced very attractively. Their is a lot of uncertainty about the future of a company like Gannett, which is the reason that the earnings multiple has contracted so severely. Even when compared to other newspaper companies that have remained profitable through the downturn (and they are dwindling), Gannett’s P/E multiple of under 4x compares favorably to the Pearson (PSO) trading at a multiple of 10x and The Washington Post (WPO) which trades at a multiple of over 30x.
We would be remiss if we did not mention there is significant amount of debt Gannett is carrying, but with a current ratio of greater than 1 there is no immediate concern. At Ockham, we have to balance the appeal of the valuation with the concerns over the future of their industry and we have a Fairly Valued rating at present. Gannett cannot continue hemorrhaging subscribers as well as losing ad revs without their debt burden becoming to great a weight to bare. We are encouraged by this quarters results and will consider upgrading this stock if these trends continue.
There will need to be some changes in the way Gannett operates including shutting down a fair portion of the more than 800 publications that they produce. The CFO discussed furloughs and increasing the company’s “digital footprint”. These are continuing some positive steps that allowed the company to cut operating expenses 11% in the quarter. June was the company’s best month thus far in 2009 for ad revenue comparison to last year. Most importantly, if Gannett can continue to be profitable as other weaker competitors drop off, they will gain greater market share and more ad revenue will follow consumers’ eyeballs.
It may never be the way it was before, but Gannett has remained profitable (when discounting one time items) through one of the toughest periods in its history. This is a tough call between being deep value or a falling knife, but the recent improvement is encouraging. Do not be surprised to see the multiple expand further from here, as we could see the stock trading as high as $11 given current fundamentals.