Risk, Reward Balance Gannett - Analyst Blog

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The economy, which is still not awaken completely from a state of hibernation, has been taking its toll on publishing companies, and Gannett Company, Inc. ( GCI ) is no exception. However, the companies are contemplating on finding new revenue generating avenues.

Advertising - an Inherent Risk

Advertising, which remains a significant source of revenue for the company, in turn depends upon the global financial health.

We observe that Gannett's publishing advertising revenue fell 7.1% during the fourth quarter of 2011, following a decline of 8.5% in the third quarter. Tough macroeconomic conditions along with softness in advertising demand impacted the results. Advertisers are shying away from making any upfront commitments in a cloudy economy.

Another diversified media conglomerate, The New York Times Company ( NYT ), professed of a challenging economic environment, which we believe will continue to dampen advertising revenue.

The ongoing slouch in the advertising market continues to weigh upon The New York Times Company, the publisher of The New York Times , the International Herald Tribune , The Boston Globe and 15 other daily newspapers. Total advertising revenue slid 7.1% to $358.5 million in the fourth quarter, as against a fall of 8.8% registered in the third quarter.

Diversifying Business Model

Gannett is taking initiatives to diversify its business model by adding new revenue streams in an effort to make it less susceptible to economic conditions. The company is also adapting to the changing face of the multiplatform media universe, which currently includes Internet, mobile, tablet, social media networks and outdoor video advertising.

In an effort to offset the declining revenue and shrinking market share, publishers are scrambling to slash costs. Gannett has been realigning its cost structure and streamlining its operations to increase efficiencies, and in turn the operating performance.

To curb shrinking advertising revenue and seek new revenue avenues, the publishing companies contemplated on charging readers for online content. Despite hiccups in the economy, it still promises revenue generation.

Gannett is repositioning itself for improvement in print and digital media through a new subscription based model, whereby subscribers will be able to access the paid content through websites, mobile and tablet, and will have the preference of choosing the frequency of home delivery of print editions. On the other hand, the company will limit the number of free articles that a non-subscriber can access.

Gannett hinted that Internet users will be allowed to access 5 to 15 articles per month without shelling out a penny. The company said that once implemented the model will fetch $100 million.

In March 2011, The New York Times Company launched a pricing system similar to that of the Financial Times' metered system, whereby after browsing a certain number of free articles, readers will be asked to subscribe to enjoy full access to its articles on phones, tablet computers and the Internet.

Plus Points

Gannett witnessed healthy growth across its core television advertising and digital revenue during the fourth quarter of 2011. The company stated that excluding cyclical political advertising demand, television revenue climbed 11.3%, attributable to an increase in auto advertising. Retransmission revenue jumped 30.3% during the quarter. Digital segment revenue rose 9.4% to $181.5 million due to robust revenue growth at CareerBuilder.

The company is deploying its operating cash to pay down debt and lower its leverage. The company lowered its long-term debt by $158 million and generated an operating cash flow of $274 million and free cash flow of $203.3 million in the fourth quarter. Debt to EBITDA ratio at the end of the quarter was marginally below 1.7x, suggesting financial flexibility.

Gannett is also actively managing its capital, returning much of its free cash to shareholders via share buybacks and dividends. The company in July 2011 doubled its quarterly dividend and announced the resumption of a $1 billion share repurchase program approved on July 25, 2006. During the fourth quarter, the company bought back 2.3 million shares for $25 million, and still has approximately $756 million remaining at its disposal.

Given the pros and cons, we prefer to maintain our long-term "Neutral" recommendation on the stock. Moreover, Gannett holds Zacks #3 Rank that translates into short-term "Hold" rating.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: GCI , NYT

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