GANNETT CO. INC. $24 (New York symbol GCI; Conservative Growth Portfolio, Consumer sector: Shares outstanding: 229.1 million; Market cap: $5.5 billion; Price-to-sales ratio: 1.1; Dividend yield: 3.3%; TSINetwork Rating: Average; www.gannett.com) publishes 99 newspapers in the U.S. and U.K., including USA Today, its flagship paper. It also publishes 680 magazines and weekly papers and owns 23 U.S. television stations.
Newspapers account for 70% of Gannett’s revenue, followed by TV (16%) and websites (14%).
Shift to digital hurt ad sales
Like most publishers, Gannett has struggled as advertisers shift to the Internet. That’s the main reason why its revenue fell 22.6%, from $6.8 billion in 2008 to $5.2 billion in 2011. However, revenue rose 2.2%, to $5.4 billion, in 2012, as the Summer Olympics and the presidential election spurred demand for TV ads.
Earnings fell sharply, from $3.04 a share (or a total of $694.2 million) in 2008 to $1.79 a share (or $423.5 million) in 2009. Earnings turned around in 2010, to $2.23 a share (or $583.3 million) thanks to lower newsprint prices and a drop in payroll expenses after the company cut jobs in response to the lower ad revenue. Earnings fell again in 2011, to $1.81 a share (or $439.8 million), but recovered to $2.18 a share (or $529.4 million) in 2012.
Gannett is expanding its own Internet businesses as part of its new long-term strategy. Its plan includes installing “paywalls,” which deny users access to content if they don’t have a subscription.
So far, the company has installed paywalls on the websites of 78 of its newspapers, excluding USA Today. In most cases, Gannett is offering online access with a regular newspaper subscription, which has helped boost circulation. About half of its print subscribers now have digital access.
Deal nearly doubles the TV division
Gannett is also expanding its TV operations. It recently agreed to buy Belo Corp. (New York symbol BLC), which owns 20 TV stations, five all-news cable channels and over 20 websites.
Gannett will pay $1.5 billion for Belo. If you include Belo’s debt, the entire deal is worth $2.2 billion. The company will have to borrow the cash it needs to complete the sale, but its long-term debt of $1.4 billion (as of June 30, 2013) is a moderate 25% of its market cap. As well, these stations’strong cash flows will help it pay down the new loans.
Belo should add $0.50 a share to Gannett’s earnings in 2014. By combining overlapping operations, the company feels it can cut its annual costs by $175 million within three years.
Share buybacks to continue
Even with the extra debt, Gannett plans to keep buying back its shares. In the first half of 2013, it spent $41.4 million on repurchases and expects to buy back an additional $300 million of its shares over the next two years.
The stock jumped 20% on the Belo news, but it still trades at just 11.0 times its likely 2013 earnings of $2.19 a share. The $0.80 dividend yields 3.3%.
Gannett is a buy.
