Gannett's profits are driven by its robust TV business, but its shares are dragged down by newspapers. Why its local gambit could pay off big.
By ALEXANDER EULE | May 31, 2014When Gannett launched USA Today in 1982, the company was on the cutting edge of technology, beaming the paper's content by satellite to printing plants around the country. Three decades later, most investors view Gannett as a dinosaur. At a recent $28, it was trading at under 11 times earnings estimates for the next 12 months, making it one of the cheapest stocks in the Standard & Poor's 500.
But Gannett (ticker: GCI) hasn't lost its innovative roots. A majority of profits now come from local TV stations, thanks to a $2.2 billion deal last year for Belo Corp. Meanwhile, all of Gannett's 80 local papers, from the Argus Leader, in Sioux Falls, S.D., to the Great Falls Tribune, in Montana, now have a pay wall in front of their Websites. The strategy has helped stabilize revenue at the publishing unit, just as an improving economy, political ads, and licensing fees are boosting broadcast operations. Total sales are likely to rise 15% this year, to $6 billion, with earnings up 33%, to $628 million, or $2.68 a share.
"So many people are still anchored in how tough things were in the newspaper industry and not giving them credit for their focus on the small towns and the real value there," says John Rogers, chairman and CEO of Ariel Investments, a longtime Gannett holder. Rogers thinks the stock could top $40 in 18 to 24 months. The shares yield 2.9%.
Broadcast is an increasingly larger part of the company. Three weeks ago, Gannett paid $215 million for six Texas TV stations; the purchase comes five months after the company closed its much larger Belo deal, which brought 17 big-market stations into the fold. In all, the company will have 46 stations across the country. Indeed, this year for the first time, 
more than 50% of Gannett's estimated $1.5 billion in Ebitda (earnings before interest, taxes, depreciation, and amortization) will come from television.
"I think investors have begun to realize that more and more of our Ebitda and growth is shifting, as we promised, to higher-margin, higher-growth businesses," Gannett CEO Gracia Martore tells Barron's. The shift could boost Gannett's price/earnings ratio closer to that of its broadcast peers, which trade at 14 to 22 times forward earnings. At 15 times earnings, Gannett is worth $40.
Gannett's local stations are benefiting from multiple industry-wide trends: a surge in political advertising and the rapid growth of licensing fees from cable and satellite distributors. Local station groups are increasingly insisting on big payments from pay-TV operators to carry their signals. The so-called retransmission fees were at the center of last year's dispute between Time Warner Cable (TWC) and CBS (CBS), which owns local stations in large markets. CBS ultimately forced the cable company to double its payments to $2 per subscriber, according to industry estimates. In the first quarter, Gannett's own retransmission fees jumped 66%.
GANNETT IS ALSO still benefiting from a wise decision it made in 2008, when it took a majority position in CareerBuilder.com, the country's largest online job site, which was originally built alongside other newspaper companies. Revenue at Gannett's digital segment -- dominated by CareerBuilder -- grew 4% last year, to $748 million.
But newspapers still cast a pall on growth. Many of Gannett's peers have been pushed to separate their newspaper business from their other operations because it weighs on investor sentiment.
Shares of News Corp, the publisher of Barron's, jumped 45% between the time it announced a spinoff in June 2012 and its completion a year later. Since then, the entertainment business -- renamed 21st Century Fox (FOXA) -- and the publishing assets -- still called News Corp (NWSA) -- have both continued to climb.
Tribune (TRBAA) and Time Warner (TWX) are also spinning off their publishing assets. Shares of Time Inc. (TIME) will begin trading on June 6; Tribune Publishing, soon after.
Gannett is repeatedly asked if it might follow suit. "It would make a lot of sense," says Joe Cornell, who runs Spin-Off Advisors. "I wouldn't be at all surprised if in the next 12 months, Gannett announced that they would split in two." Such a move could be a quick catalyst for the stock. On a sum-of-the-parts basis, the stock could easily be worth $34, says Barry Lucas, an analyst at Gabelli & Co.
Martore, however, has never been one to follow the crowd. In 2006 and 2007, when she was chief financial officer of the company, Gannett sat on the sidelines as peers went on credit-fueled buying binges. Those deals were ruinous when the credit bubble burst in 2008.
"What's been a hallmark of Gannett is that we don't allow external forces or the fads of the moment to sway us to do something that will give you just a short-term pop," she says. Asked about a potential spinoff, Martore adds, "The board and I are always focused on what ultimately is going to create the most shareholder value in the intermediate to long term…so we would never rule anything out."
WHAT'S CLEAR IS that Gannett is going to win or lose based on local content. USA Today, once Gannett's flagship, is becoming almost a complementary part of the portfolio. The national edition is still read by 3.3 million people in print and online, but the content is also being inserted into local papers and Websites.
"I think we hit that very correct mix of understanding local is the most important," Martore says. Gannett's outlets are spread across the country; it has TV stations in 22 states and newspapers in 30 states (see map below).
Local is a key ingredient for Bill Smead, the CEO and chief investment officer of Smead Capital Management. He sees Gannett as the cheapest and best way to play a continued recovery in the economy and the rise of millennials. Rather than betting on what products people will buy, Smead wants to own a business that reaches people through ads on TV, in newspapers, and online. "Gannett," he says, "has a set of toll bridges that you have to cross to get to 35% of the U.S."
---------------------------------------------------------------------------------------------------------------------------------------------------------
Spin-Off Research is published by Spin-Off Advisors, LLC. Spin-Off Research is a subscription-based service for Professional and Institutional Investors. Blog entries are delayed. Spin-Off Research subscriber-base receive the spinoff report at time of press via Email Bulletins. To learn more about becoming a subscriber, please contact us. Spin-Off Advisors, LLC provides coverage on all US and major Global spinoffs, carve-outs and split-offs; Spin-Off Research published since March 1997.
Since exiting bankruptcy in January 2013, 
