A subscriber doubts about my mental sanity.
To summarize his remarks:
“You should be crazy to pick Gannett (GCI). Don’t you know that internet will kill this business?”
Yes, I know. As cars ought to kill the train business, airplanes exterminate all the other transportation business, television the cinema business, et cetera. Oh, I was forgetting: video killed the radio star too.
Internet then was presented as a real serial killer, it should kill almost every other communication business: books, printing, telecom, newspapers, you name it.
In fact all those businesses are still around. They suffered, scaled back, restructured, reinvented themselves and even found a way to profit from the new possibilities offered by their supposed killer.
So I humbly suggest to take the Microsoft CEO’s position on this matter, that is newspapers will not exist anymore ten years from now, with a grain of salt.
Of course, a lot of the companies operating in those sectors were forced out of business and many others will fail in the future; just the stronger ones did and will make their way out of the challenge.
Is Gannett one of them? I think it has a strong chance. Its top management may be highly remunerated, but judging from their past and even present performance they don’t seem to be stealing the money. They did not stupid things as ultrapay for peers acquisitions at the top of a cycle loading the company with tons of debt (the McClatchy way), and Gannett’s operating performance has been stellar in the past years. In the last ten fiscal years to 2007 the company has managed to deliver a whopping 53.18 $ per share in structural free cash flow, nearly 3 times its current price.
Boy, THAT’S a performance!
Just past splendour? Let’s keep on running cold numbers.
In the last quarter the company had sales that were down 10.9% year over year, while EBITDA was down 22.6% over the same time span; EBITDA margin was down less, just 13.2% from 28.8% to 22.6%. So things seems really difficult. But if you compare the last quarter to the precedent, you’ll see sales up 2.45% and EBITDA up 8.7%, while EBITDA margin was up nearly 6%, from 23.6% to 25%.
Moreover if you go to the old cool cash, you’ll find out that structural operating cash flow (i.e. CFO before changes in the working capital and deferred tax, my preferite way to analize a company’s cash power) was actually better in the first half of this year compared to past year, scoring 3.41 $ per share vs. 2.98 $, up a fine 14.4%. That cash from operations covers 13.4 times the capital spending vs. 11.64 last year, and 4.2 times the dividend. It’s true that last year it covered the dividend 5 times, but in the meanwhile the dividend has increased 30%. Gannett yields 8,6% at current stock price.
Are you worried about the debt? You should not, in my humble opinion (even if I’d like to see a smaller figure here). Total debt stands at 4.3 mld $, a decrease of 5,1% yoy, but net debt decreased much more, -15.6% at 3.7 mld $. If you annualize this year first half structural CFO, that figure could cover the net debt in less than 2.5 years. Besides, the interest coverage has gone from 8.36 times in last year second quarter to 9.77 times this year.
In short, this dying business has generated an average annual structural free cash flow of 5.32 $ in the last ten years to 2007, 4.41 $ in 2007 fiscal year and 3.46 $ just in the first half of this year.
I’d love to die this way.
It’s true that the business is slowing and the company has quite a challenge to face, a shift of paradigm. But it’s also true that its expertise could very well capitalize on the new opportunity. The moat of an established publishing company (Gannett is one of the world leaders) can’t be seriously challenged by me and you or start-up companies even in the internet era. All the googles of this world will not be able to completely eat its lunch, it will keep a defendable niche and even counterattack exploiting the convergences of the contemporary world’s media. By the rest, guessing about the future of a business resembles more to a prophecy than an analysis, but that’s true for everyone. And today you can buy Gannett for 18.9 $, that is 61% less than one year ago.
I could be very well crazy, but if someone offers me to buy a business whose enterprise value discounts just 6.64 times the average annual structural FCF of the last ten years, 8 times that of 2007 and 5.1 times that of the first half of this year annualized, well, I’d buy.
After all, I’m not betting the ranch.
Disclosure: Author is long GCI common, short GCI call.
Tags: Gannett
August 11, 2008 at 4:56 pm |