This Company Won't Go Down Without a Fight

By Chad Henage - July 21, 2012 | Tickers: GCI, GOOG, NYT | 0 Comments

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Newspaper companies are not what they used to be. I would even take a page from Peter Lynch's writings about newspapers, when in the 1980s he said that newspaper companies were virtual monopolies. With the advent of the Internet, and as much advertising being done on television as in paper, owning a newspaper company is no longer the sure thing that investors once could count on. Specifically, Gannett Inc. (NYSE: GCI) just reported earnings, and clearly the publishing industry has changed. That being said, if investors think this company is going down, they are in for a long wait. 

I've written in the past, that the newspaper industry is one that either, “adapts or goes away.” In this prior post, I called out Gannett, and specifically its USA Today division, as one that understood the move towards digital consumption. I can honestly say, that in my adult life I have never had a newspaper subscription. Most of my news I get either through the Internet, or from television. Gannett understands this, and has been strengthening its broadcasting and digital businesses. Another direct competitor of Gannett, The New York Times (NYSE: NYT) seems to be on the opposite end of the spectrum. This is especially evident when you consider analyst future growth expectations for each company. With analysts calling for Gannett to grow EPS by over 7% in the next 5 years, versus growth of less than half a percent at The New York Times. Let's take a look at what Gannett is doing to move its business forward.

While total operating revenues decreased 2.1%, the company pointed out that digital revenues increased 13%. In addition, the company generated $140 million in free cash flow, and retired nearly 3% of outstanding shares versus last year. The company's president and CEO Gracia Martore, said that they expect circulation revenue growth in the range of 25% as the, “demand for their digital marketing services is strong and already attracting significant new client relationships.” However, the company knows that it has a big challenge in front of it when it comes to the traditional publishing business.

With overall publishing revenues down 5.5%, this level of decrease doesn't sound terrible when you consider the huge change in the industry over the last several years. Every segment of the company's publishing revenue declined. Retail advertising was down 7%, national advertising was down almost 17%, and classified ads were down 5.3%. Clearly advertising is moving away from print media, and more towards television and the Internet.

To combat this challenge, Gannett is pushing not only the company's broadcasting capabilities, but also their digital properties. You can see that these efforts are paying off, as broadcasting revenue increased 11.4% due primarily to stronger television advertising demand. The company expects this demand to stay strong, and likely increase going into the fall as the election period gets closer. When it comes to the company's digital properties, CareerBuilder was the star performer that helped digital revenues increase 4.5%. As you can see, with broadcasting and digital growing, this helps the company stave off losses on the publishing side of the house. These offsetting divisions, help the company maintain positive free cash flow.

In the most recent quarter, the company generated over $154 million in operating cash flow, and only used about $20 million for capital expenditures. With roughly $134 million in free cash flow versus about $47 million in dividend payments, investors should not have to worry about the safety of the dividend. In addition, while the company has a significant amount of long-term debt, at over $1.6 million, interest expense actually declined 19% due to lower balances and lower interest rates. Clearly the company's Board of Directors is comfortable with the direction that Gannett is headed. During the most recent quarter alone, the company repurchased about 3.4 million shares at a cost of $45.5 million. Probably the most surprising numbers in this earnings report, were the split of revenue, versus operating cash flow. While over 65% of total revenue comes from publishing, over 54% of operating cash flow actually came from broadcasting and digital media. In the future, as broadcasting and digital continue to grow, and publishing continues to shrink, a strange thing could happen. The company could actually report smaller revenues, yet greater profits.

However, the industry obviously has quite a few competitors, and Gannett has to continue to innovate. Just one example of the companies dedication to moving its properties online, is the USA today app that is available on most smartphones and tablets. The app is free, and yet gives the reader the best of a USA Today newspaper (including the advertising), and yet cost nothing to download or to use. On the other end of the spectrum, is The New York Times. Though the stock sells for just about 10 times forward earnings, the company doesn't seem to understand the move towards digital media. The company believes in the old school idea of selling a subscription even if the consumer is using a smart phone or tablet. However, consumers realize they can get their news elsewhere, and many are not comfortable paying for a subscription.

Probably the biggest challenger to Gannett is Google (NASDAQ: GOOG). The company gets greater than 80% of its revenue from advertising dollars. With Google selling for just 13.41 times forward earnings, the stock is certainly not expensive, and Google is also growing faster than Gannett. In fact, analysts expect Google to grow EPS by over 17% in the next few years. In addition, Google has an advantage in producing more free cash flow per $1 of sales. In the most recent quarter, Google produced $0.29 of free cash flow for each $1 of sales, versus Gannett produced about $0.12 of free cash flow using the same measure. That being said, the higher-quality reporting done by USA Today might be the silver bullet that Gannett needs to compete against a behemoth such as Google. While Google likely represents a better growth story, investors looking for income would be well served to read up on Gannett. With a current yield over 5.6%, and EPS growth expected in the future, it might be news to investors that this dividend will probably be around for quite a while.

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