Is This Company's Recent Dip Good News?

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investors in Gannett (NYSE: GCI) have enjoyed gains of around 25% in the last year, in addition to pocketing a healthy annual dividend of around 4%. But after company reported strong fourth-quarter results, investors decided to roll the newspaper stock and throw it out of the window.

Gannett shares fell 6.7% after earnings, as the company prepares for a year sans drivers such as the election or the Olympics. Moreover, the Super Bowl’s move from NBC to CBS would further weigh upon Gannett in the current quarter, since it had 12 NBC TV stations as opposed to only 6 on CBS. But there are certain fundamental improvements in Gannett’s business that can’t be ignored.

Solid improvements

The company is trying to adapt itself to the digital world and it has done commendably so far. The stock’s solid rise over the past year is not without reason, as Gannett posted its first annual revenue jump since 2006. The company is trying to extend the reach of its paywall as much as possible to cover for the declines in print advertising revenue and it has done well so far.

Even though advertising sales in the publishing business fell 2%, Gannett’s circulation revenue jumped an impressive 16.8% from last year on the back of its all access subscription model. On the other hand, Gannett’s total digital revenue across the company jumped almost 27% from last year (excluding the extra week in the quarter), and includes an outstanding 80% jump in digital publishing revenue. Gannett’s digital revenue now constitutes 25% of its total revenue, which further indicates that the company is making solid progress.

Digital growth on a roll

These things point to the fact that Gannett is indeed moving in the right direction, and in my opinion investors should hang on to the stock as its strategies seem to be paying off. Gannett’s subscription model has been adopted by 46,000 digital-only subscribers in just 10 months. The company plans to increase its digital-only subscribers by 5 to 7 times this year, and this is expected to result in additional operating profit of $80 million this year.

Gannett is continually improving its digital portfolio by enhancing its applications for the Apple (NASDAQ: AAPL) iPad. While Gannett is witnessing increased access through iPhone native applications and mobile browsers, it knows that tablets are one of the prime drivers behind growth of its digital business.

According to comScore, 40% of tablet owners in the U.S. read newspapers or magazines on their devices in August last year. Out of these, 38% used an iPad and this figure should improve this year. Apple has broadened its iPad portfolio with the iPad mini, a tablet that is considered more comfortable for reading, catapulting iPad sales to almost 23 million in the previous quarter. Gannett’s increased focus on improving its applications for mobile devices should help it in improving its digital subscriber base.

Growth of Gannett’s digital business has been aided by CareerBuilder pretty well so far. CareerBuilder has been winning market share in the U.S. and Gannett is focused on expanding its reach internationally. Further, the company expects that its acquisition of Economic Modeling Specialists International (EMSI) will further help it increasing its lead in the employment and labor market both within and outside the U.S.  

A slowdown in broadcasting revenue, which jumped almost 44% in the previous quarter, shouldn’t come as a surprise to investors and analysts. Political revenue and the Olympics boosted Gannet’s top line last year, but they happen once every four years. Their absence shouldn’t be taken as a “bad news” and lead to a sell-off, as it happened post earnings.

The Foolish takeaway

Apart from improving and expand its business, Gannett is also focused on delivering returns to shareholders through buybacks and dividend. Last year, the company boosted its dividend by 150% and repurchased shares worth $154 million. And potential investors can buy into these positives at a trailing P/E of just 10 times.   

With the drop in revenue and earnings already priced in, the stock should probably continue its steady rise as the year progresses. Gannett’s strategies have done well so far and they are expected to yield positive results this year. Thus, if you are holding this stock in your portfolio, you shouldn’t throw it away since Gannett has delivered so far and is focused to keep up the good work.

TechJunk13 has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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