Wednesday, July 13, 2005

Review of Gannett's Q2 earnings

Gannett is the first major newspaper/broadcasting company to report Q2. I always view old media company as the leading indicator to the economy (see post below), so I track them very closely.

For details: Q2
Press Release

Here's my quick 2 cents:

There are 3 drivers to the story that you need to track.

The gem to story is, its internet sites (and various other local papers that have websites). Today, web based revenues are only generating slightly over 10% of total revs. The other 90% of its revs are both cyclical and in structural decline. In order for the story to get exciting, I would like to see the mix to be at least 50% internet and/or valuation get really cheap whichever comes first.

Second, old media like I mentioned continued to plaque general growth. Newspaper circulation continue to decline and circulation revenues growth is currently helped by price increase in USA TODAY. However, this is unsustainable as we all know price boost on declining volume will do more damage in the long term. Advertising is very cyclical and right now GCI is facing tough comparision till the end of the year due to 2004 political advertising compaigns. The other key point that I would like to make is that job wanted ads are contributing as much as 40% of revenue. We are almost 3 years into this job recovery, and if anything, one has to discount a higher
PROBABILITY that job wanted ads may be in the last stage of this cyclical recovery.

Third, you need to track national versus local advertising. Typically, when CFOs get more cautious, they would most likely cut national advertising first as they are more costly and experiment with local advertising to get bigger bang for the buck. National is currently in decline versus local advertising, so this could be an early tell to the national economy that you may not hear from CNBC.

Overall, GCI is stuck between the rock and the hard place. Business is ok but has the potential to get worse and its valuation is not compelling yet (in spite of Wall Street analysts shout of BUYS). Estimates still run about double digits next year and P/Ebitda is around 9x, around median valuation. For a stock to be interesting to me, I need to see stock at 5-6x p/ebitda. By then, you'd likely see estimates running low single digits or even negative (a rare events on Wall Street). Then you'd BEEP BEEP, back the truck UP!


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