NYSE: GCI
GANNETT CO INC
Report created Aug 1, 2016 Page 1 OF 5
Gannett Co. Inc., headquartered in McLean, Virginia, is a leading global publishing company focused on
newspapers. The company reaches over 100 million people monthly. With more than 100 markets
internationally, it is known for Pulitzer Prize-winning newsrooms, powerhouse brands such as USA TODAY,
and specialized media properties.
Argus Recommendations
Twelve Month Rating SELL HOLD BUY
Analyst's Notes
Five Year Rating SELL HOLD BUY
Analysis by John Eade and Katelyn Bayone, August 1, 2016
ARGUS RATING: BUY
Sector Rating
• High yield in low rate environment.
• Though Gannett continues to face challenges from the secular decline of print newspapers, the
company has a clean balance sheet, a focus on digital growth, a share buyback program, and a hefty
dividend yield of about 5%.
• On July 27, Gannett reported 2Q16 EPS that missed consensus by a penny. Operating revenue
climbed 3%, but did not meet the street expectations of 6.7% growth.
• Gannett is pursuing a growth by acquisition strategy, acquiring ReachLocal and North Jersey Media
Group during the quarter. Gannett proposed a higher offer to Tribune Publishing, which was again
declined.
• Our target price of $16 - down from $20 as we have lowered our EPS estimates -- implies a P/E of
just 11-times projected 2017 earnings.
INVESTMENT THESIS
Our rating on Gannett Co. Inc. (NYSE: GCI) is BUY. Though the newspaper company
continues to face challenges from the secular decline of print newspaper circulation and
advertising, Gannett has a clean balance sheet, a focus on digital growth, a share buyback
program, and a hefty dividend yield. Management is also focused on controlling costs and
is pursuing a growth-by-acquisition strategy. Valuation appears attractive. Top-line
growth will likely be difficult over the medium term, so we don't expect a premium
multiple for GCI. But our target price of $16 implies a P/E of just 11-times projected 2017
earnings.
RECENT DEVELOPMENTS
Over the past quarter, GCI shares underperformed the market, declining 23%
compared to a 4.5% gain for the broader S&P 500. The 2Q earnings release alone pushed
shares down 10%. Shares were underperforming before the announcement due to
uncertainty surrounding merger talks with Tronc (formerly Tribune) and the announced
acquisition of ReachLocal. Analyst estimates have impacted shares as well. Consensus for
Market Data
Pricing reflects previous trading week's closing price.
200-Day Moving Average
Target Price: $16.00
52 Week High: $14.42
52 Week Low: $12.36
Closed at $12.76 on 7/29
Price
($)
14
12
Rating
BUY
HOLD
SELL
Key Statistics pricing data reflects previous trading day's closing
price. Other applicable data are trailing 12-months unless
otherwise specified
Market Overview
Price
Target Price
52 Week Price Range
Shares Outstanding
Dividend
$12.76
$16.00
$11.73 to $17.91
116.53 Million
$0.64
Sector Overview
Consumer Discretionary
Sector
UNDER WEIGHT
Sector Rating
12.00%
Total % of S&P 500 Market Cap.
Financial Strength
Financial Strength Rating
Debt/Capital Ratio
Return on Equity
Net Margin
Payout Ratio
Current Ratio
Revenue
After-Tax Income
MEDIUM
-16.7%
3.6%
0.47
1.28
$2.85 Billion
$103.08 Million
($)
0.00
0.00
0.00
0.00
0.29
0.00
Annual
0.46
0.43
0.53
0.27
1.79
8.86
9.31
0.52
1.37
$9.29
$1.49 Billion
Forecasted Growth
EPS
0.30
0.32
0.48
1.37 ( Estimate)
0.28
0.32
0.34
0.50
1.44 ( Estimate)
Revenue
1 Year EPS Growth Forecast
-23.46%
5 Year EPS Growth Forecast
7.00%
1 Year Dividend Growth Forecast
0%
Risk
($ in Mil.)
0.0
0.0
0.0
0.0
717.0
727.0 701.0
2884.0
739.0
Q1
Q2
Q3
2014
Q4
Q1
Q2
Q3
2015
Q4
0.0
Annual
FY ends
Dec 31
Key Statistics
Current FY P/E
Prior FY P/E
Price/Sales
Price/Book
Book Value/Share
Market Capitalization
16
Quarterly
Argus assigns a 12-month BUY, HOLD, or SELL rating to each
stock under coverage.
• BUY-rated stocks are expected to outperform the market (the
benchmark S&P 500 Index) on a risk-adjusted basis over the
next year.
• HOLD-rated stocks are expected to perform in line with the
market.
• SELL-rated stocks are expected to underperform the market
on a risk-adjusted basis.
The distribution of ratings across Argus' entire company
universe is: 47% Buy, 47% Hold, 6% Sell.
Valuation
18
Quarterly
Under Market Over
Weight Weight Weight
703.0 750.0 771.0 813.0
3037.0 ( Estimate)
Q1
Q2
Q3
2016
Q4
682.0 728.0 748.0 789.0
2947.0 ( Estimate)
Q1
Q2
Q3
2017
Beta
Institutional Ownership
-91.96%
Q4
Please see important information about this report on page 5
©2016 Argus Research Company
Argus Analyst Report
NYSE: GCI
GANNETT CO INC
Report created Aug 1, 2016 Page 2 OF 5
Analyst's Notes...Continued
the third quarter and the full year are both down double-digits in
the last four weeks. Shares have also underperformed over the past
year, with a 3.3% decline compared to a gain of 2.9% for the
index.
On July 27, Gannett reported 2Q16 adjusted EPS (which
excludes acquisition and severance-related items, and asset
impairment charges) of $0.30, down from $0.47 a year earlier, and
below the consensus forecast of $0.31. On a GAAP basis, net
income declined 77% to $12.3 million or $0.10 per share from
$53.3 million or $0.46 per share during the prior year.
Operational revenue increased 3% to $748.8 million. Operating
expenses at Gannett grew 6.9%. The 2Q16 adjusted EBITDA
margin dropped 130 basis points from the prior year to 12%, while
adjusted EBITDA fell 7.5% to $89.7 million. For the first half, the
company has earned $0.57 per share.
Management updated guidance for the second half and now
expects revenue growth between 7%-9%. They emphasized that
3Q is a tough quarter and that margins will continue to be under
pressure. Management also expects foreign currency exposure to
the UK to have a negative impact on adjusted EBITDA of about $6
million during the rest of the year.
The company is pursuing a growth-by-acquisition strategy
aimed at leveraging economies of scale to drive operating results. In
April, Gannett acquired Milwaukee-based Journal Media Group
(JMG) for $280 million, or $12 per share in cash. Gannett financed
the merger using available cash and by borrowing $250 million
under its $500 million revolving credit facility. While management
looks for this purchase to grow Gannett's overall revenue with
potential to increase synergistic efficiencies, it was unable to
provide revenue or EBITDA forecasts.
In addition to the JMG acquisition, Gannett proposed in late
April to acquire Tribune Publishing (TPUB) for $815 million, or
$12.25 per share, in an all cash deal that included the assumption
of $390 million in debt. Management believed that a TPUB
acquisition would advance their strategy to grow the USA TODAY
Network by increasing their range of local markets and new
platforms for their subscribers. However, in early May, Tribune
declined Gannett's offer, with its chairman stating, 'We're not for
sale.' And on May 9, Tribune's board adopted a shareholder rights
plan to prevent Gannett's unsolicited bid. With that said, some
shareholders of TPUB, including its second largest, Oaktree Capital
Group, want the company to further explore Gannett's offer. On
June 7, Gannett raised its offer price to $864 million, or $15 per
share, which Tribune again turned down, citing that the company
is being undervalued. Gannett said it would keep the offer on the
table and evaluate Tribune's 2Q results which are due in August.
In late June, Gannett announced plans to acquire ReachLocal
for $156 million in cash. ReachLocal is a provider of digital
services for small and medium sized businesses which is expected to
expand Gannett's digital revenue by 50%. The transaction is
expected to be completed in the third quarter. The transaction is
expected to achieve modest accretion to EPS in its second full year.
Growth & Valuation Analysis
GROWTH ANALYSIS
($ in Millions, except per share data)
Revenue
COGS
Gross Profit
SG&A
R&D
Operating Income
Interest Expense
Pretax Income
Income Taxes
Tax Rate (%)
Net Income
Diluted Shares Outstanding
EPS
Dividend
GROWTH RATES (%)
Revenue
Operating Income
Net Income
EPS
Dividend
Sustainable Growth Rate
VALUATION ANALYSIS
Price: High
Price: Low
Price/Sales: High-Low
P/E: High-Low
Price/Cash Flow: High-Low
Financial & Risk Analysis
2012
3,470
2,166
1,304
823
—
331
—
345
68
20
277
—
—
—
2013
3,325
2,090
1,235
773
—
325
—
346
71
21
274
115
2.39
—
2014
3,172
1,998
1,174
765
—
262
—
278
68
24
211
115
1.83
—
2015
3,100
1,963
1,137
755
—
243
—
260
57
25
203
117
1.77
0.16
2016
2,827
1,807
1,020
695
—
187
—
204
60
—
144
118
1.22
0.48
—
—
—
—
—
—
-11.0
-1.9
-1.0
—
—
—
-4.5
-19.3
-23.2
-23.4
—
—
-9.4
-35.4
-30.7
-31.7
—
16.1
—
—
—
—
—
8.8
—
—
—-—
—-—
—-—
—
—
—-—
—-—
—-—
—
—
—-—
—-—
—-—
$17.91
$10.75
0.7 - 0.4
10.1 - 6.1
6.9 - 4.1
—
—
—-—
—-—
—-—
FINANCIAL STRENGTH
Cash ($ in Millions)
Working Capital ($ in Millions)
Current Ratio
LT Debt/Equity Ratio (%)
Total Debt/Equity Ratio (%)
2014
72
121
1.30
—
—
2015
—
—
1.28
—
—
2016
—
—
—
—
—
RATIOS (%)
Gross Profit Margin
Operating Margin
Net Margin
Return On Assets
Return On Equity
37.0
8.3
6.6
8.6
19.1
35.3
5.9
5.1
6.1
14.6
—
—
—
—
—
RISK ANALYSIS
Cash Cycle (days)
Cash Flow/Cap Ex
Oper. Income/Int. Exp. (ratio)
Payout Ratio
30.1
—
—
—
23.4
—
—
—
—
—
9.6
The data contained on this page of this report has been
provided by Morningstar, Inc. (© 2016 Morningstar, Inc.
All Rights Reserved). This data (1) is proprietary to
Morningstar and/or its content providers; (2) may not be
copied or distributed; and (3) is not warranted to be
accurate, complete or timely. Neither Morningstar nor its
content providers are responsible for any damages or
losses arising from any use of this information. Past
performance is no guarantee of future results. This data
is set forth herein for historical reference only and is not
necessarily used in Argus’ analysis of the stock set forth
on this page of this report or any other stock or other
security. All earnings figures are in GAAP.
Please see important information about this report on page 5
©2016 Argus Research Company
Argus Analyst Report
NYSE: GCI
GANNETT CO INC
Report created Aug 1, 2016 Page 3 OF 5
Analyst's Notes...Continued
On July 6, Gannett announced the acquisition of North Jersey
Media Group Inc. which includes 'The Record' and 'Herald News'.
The transaction is expected to contribute approximately $90
million in annual revenues.
EARNINGS & GROWTH ANALYSIS
Gannett generated $748.8 million in revenue in 2Q16, up 3%
from $727.1 million in the same period last year. The company's
business is separated into three segments with the following
breakdown: 55% advertising revenue, 38% circulation revenue,
and 7% other revenue. Circulation outperformed other segments
during the quarter, up 7% while Advertising was down slightly and
Other revenue was up 1.3%.
Management noted that reported revenues were partially
affected by unfavorable currency translation ($5.7 million), the
exiting of select operations ($9.7 million), and by a decision to
begin reporting sales from certain third-party digital advertising
products on a net basis. Excluding these items, revenues increased
$52.7 million, or 7.3%, compared to the second quarter of 2015,
representing a sequential improvement from the 4.6% decline on
the same basis in the first quarter of 2016. Management attributes
some of the remaining revenue increase to the addition of JMG to
the company's results beginning on April 8, as well as
improvements in advertising revenues. This was partially offset by
ongoing demand shifts and the negative impact of affiliate
agreement changes with CareerBuilder.
Despite short-term margin pressure due to M&A activity,
management's cost-cutting programs and focus on operating
efficiencies can provide solid margin growth going forward,
particularly when all of its synergies are realized.
Looking ahead, based on our forecast for negative margin
trends, we are lowering our 2016 EPS estimate to $1.37 from
$1.55. We look for acquisitions and management's cost-cutting
programs to result in growth in 2017, though margins are expected
to stay under pressure. Our 2017 forecast for EPS is $1.44, down
from $1.67.
FINANCIAL STRENGTH & DIVIDEND
We rank Gannett's financial strength as Medium. The company
had no debt on its balance sheet at March 31, but has since
borrowed $250 million under a revolving credit facility. Gannett
has cash of $190.8 million, up $117.3 million from 1Q15. Our
financial strength ranking might be higher if revenue growth was
positive without relying on acquisitions and the company wasn't
focused on cost cuts to drive EPS.
Management has signaled its intention to repurchase GCI shares
with an aggregate value of up to $150 million over a three-year
period. The board of directors has given management full
discretion over the plan to repurchase shares, either in the open
market or in privately negotiated block transactions. As of March
27, no shares have been repurchased.
Gannett pays a quarterly cash dividend of $0.16 per share. The
Peer & Industry Analysis
Growth
100
CHTR
P/E
GCI vs.
Market
GCI vs.
Sector
More Value
More Growth
Price/Sales
75
GCI vs.
Market
GCI vs.
Sector
LNKD
More Value
50
More Growth
Price/Book
GCI vs.
Market
GCI vs.
Sector
LGF
25
P/E
The graphics in this section are designed to
allow investors to compare GCI versus its
industry peers, the broader sector, and the
market as a whole, as defined by the Argus
Universe of Coverage.
• The scatterplot shows how GCI stacks up
versus
its
peers
on
two
key
characteristics: long-term growth and
value. In general, companies in the lower
left-hand corner are more value-oriented,
while those in the upper right-hand corner
are more growth-oriented.
• The table builds on the scatterplot by
displaying more financial information.
• The bar charts on the right take the
analysis two steps further, by broadening
the comparison groups into the sector
level and the market as a whole. This tool
is designed to help investors understand
how GCI
might fit into or modify a
diversified portfolio.
OMC
IPG
SNI
VIABCBS
DISCA
10
20
Value
5-yr Growth Rate(%)
Market Cap
Ticker Company
($ in Millions)
CHTR Charter Communications Inc
23,885
LNKD LinkedIn Corp
22,739
CBS CBS Corp
21,688
OMC Omnicom Group Inc
19,564
VIAB Viacom Inc
15,760
IPG
Interpublic Grp of Cos In
9,279
SNI
Scripps Networks Interactive I
6,283
DISCA Discovery Communications Inc
3,776
LGF
Lions Gate Entertainment Corp
2,943
Peer Average
13,991
5-yr
Growth
Rate (%)
5.0
33.0
12.0
8.0
10.0
9.0
12.0
20.0
9.0
13.1
Current
FY P/E
91.4
55.9
12.8
17.1
10.2
17.0
12.7
12.9
29.0
28.8
Net
Margin
(%)
-3.8
-5.1
11.1
7.3
17.1
6.4
24.4
16.3
2.1
8.4
1-yr EPS
Growth
(%)
72.4
23.5
7.8
8.7
18.9
14.7
6.2
10.8
43.5
22.9
More Value
More Growth
More Value
More Growth
PEG
30
Argus
Rating
BUY
HOLD
BUY
BUY
HOLD
BUY
BUY
BUY
BUY
GCI vs.
Market
GCI vs.
Sector
5 Year Growth
GCI vs.
Market
GCI vs.
Sector
More Value
More Growth
Debt/Capital
GCI vs.
Market
GCI vs.
Sector
More Value
More Growth
Please see important information about this report on page 5
©2016 Argus Research Company
Argus Analyst Report
NYSE: GCI
GANNETT CO INC
Report created Aug 1, 2016 Page 4 OF 5
Analyst's Notes...Continued
current yield is about 4.5%. We think the dividend is secure but
not likely to grow in 2016 or 2017.
MANAGEMENT & RISKS
Robert J. Dickey, formerly the president of Gannett's U.S.
Community Publishing division, is the CEO of Gannett.
Investors in GCI shares face numerous risks. Perhaps most
important, the secular trend in advertising is away from print
newspapers and toward digital. Consider that in 2010, online
advertising spending ($25.6 billion) overtook newspaper
advertising ($23 billion) for the first time. Looking out over the
next 10-15 years, online advertising is expected to continue to
grow at a low double-digit rate, while the newspaper industry
shrinks 3%-5% per year.
COMPANY DESCRIPTION
Gannett Co. Inc., headquartered in McLean, Virginia, is a
leading global publishing company focused on newspapers. The
company reaches over 100 million people monthly. With more
than 100 markets internationally, it is known for Pulitzer
Prize-winning newsrooms, powerhouse brands such as USA
TODAY, and specialized media properties.
VALUATION
Our analysis suggests that GCI shares are attractively valued at
current prices near $13. Since the spinoff, the shares have traded in
range of $11-$18.
From a fundamental standpoint, GCI is trading at just 9-times
our 2017 EPS estimate, well below media company averages and
the market as a whole. The yield of about 5.0% also suggests
value. Top-line growth will likely be difficult over the medium
term, so we don't expect a premium multiple for GCI. But our
target price of $16 - reduced from $20 based on our reduction in
EPS) implies a P/E of just 11-times projected 2017 earnings.
On August 1 at midday, BUY-rated GCI traded at $12.74,
down $0.02.
Please see important information about this report on page 5
©2016 Argus Research Company
Argus Analyst Report
NYSE: GCI
METHODOLOGY & DISCLAIMERS
Report created Aug 1, 2016 Page 5 OF 5
About Argus
Argus Research, founded by Economist Harold Dorsey in 1934,
has built a top-down, fundamental system that is used by Argus
analysts. This six-point system includes Industry Analysis, Growth
Analysis, Financial Strength Analysis, Management Assessment,
Risk Analysis and Valuation Analysis.
Utilizing forecasts from Argus’ Economist, the Industry Analysis
identifies industries expected to perform well over the next
one-to-two years.
The Growth Analysis generates proprietary estimates for
companies under coverage.
In the Financial Strength Analysis, analysts study ratios to
understand profitability, liquidity and capital structure.
During the Management Assessment, analysts meet with and
familiarize themselves with the processes of corporate management
teams.
Quantitative trends and qualitative threats are assessed under
the Risk Analysis.
And finally, Argus’ Valuation Analysis model integrates a
historical ratio matrix, discounted cash flow modeling, and peer
comparison.
THE ARGUS RESEARCH RATING SYSTEM
Argus uses three ratings for stocks: BUY, HOLD, and SELL.
Stocks are rated relative to a benchmark, the S&P 500.
• A BUY-rated stock is expected to outperform the S&P 500 on
a risk-adjusted basis over a 12-month period. To make this
determination, Argus Analysts set target prices, use beta as the
measure of risk, and compare expected risk-adjusted stock
returns to the S&P 500 forecasts set by the Argus Market
Strategist.
• A HOLD-rated stock is expected to perform in line with the
S&P 500.
• A SELL-rated stock is expected to underperform the S&P 500.
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Morningstar Disclaimer
© 2016 Morningstar, Inc. All Rights Reserved. Certain financial information included in this report: (1) is proprietary to Morningstar and/or its content providers; (2) may not be
copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising
from any use of this information. Past performance is no guarantee of future results.
©2016 Argus Research Company
Argus Analyst Report