Gannett Co



Gannett Co. Inc. |(GCI-NYSE) |$7.88 | |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 1Q17 Earnings Update

Prev. Ed.: Aug 12, 2016; 2Q16 Earnings Update

Brokers’ Recommendations: Neutral: 66.67% (4); Positive: 33.33% (2); Negative: 0.0% (0) Prev Ed: 1; 3; 0

Brokers’ Target Price: $11.50 (( $5.00 from the last edition, 4 firms) Brokers’ Avg. Expected Return: 45.9%

Note: A flash update was done on Aug 12, 2017 on the 2Q16 Earnings Release

Note: We do not have access to ‘Sell’ reports.

Portfolio Manager Executive Summary

Gannett Co., Inc. (GCI) owns the publishing assets of the legacy Gannett company following its Jun 2015 split into two publicly traded companies – a broadcasting and digital company called TEGNA and a publishing company called Gannett. The new Gannett owns USA Today and a host of other media assets.

Out of the 6 firms covering Gannett, 2 assigned positive ratings and 4 provided a neutral rating. None of the firms rated the stock negative.

Neutral or equivalent stance (4/6 firms or 66.67%) – The firm remains cautious as the present situation does not seem promising for publishing companies, which are bearing the brunt of waning advertising demand. However, the company’s positive outlook for the future offers some respite.

Firm expects an increase in newsprint costs and slow improvement in advertising trends. However, firm also believes that the recent acquisitions made by the company will be accretive. Also, digital endeavors will enhance its margins and offset the company’s top-line deterioration. Gannett’s efforts to aggressively cut costs have been paying off. Savings in this regard is expected to strengthen acquisition activities.

Positive or equivalent stance (2/6 firms or 33.33%) – The bullish firms believe that the decision to separate Publishing from the Broadcasting and Digital businesses will help to better harness the potential of both businesses as the two companies will have separate management teams and a much more defined capital structure. This will provide ample room to take strategic decisions related to any investment, acquisitions or new endeavors beneficial for the particular business, and in no way affect the other entity.

Moreover, though the firms are a little cautious of the greater-than-anticipated weakness in the print and advertising space, they are encouraged by the company’s strong balance sheet. Further, they believe that due to its extensive geographical footprint, the company has potential consolidation opportunities. The new company has also been realigning its cost structure and streamlining its operations to increase efficiencies.

These firms believe that Gannett is well positioned as a media company, backed by its healthy financials and broad footprint. These factors will likely help the company to boost its newspaper deals. Additionally, firms believe that Gannett’s acquisitions and other strategies will enable it to deliver better financial results.

The positive firms remain optimistic regarding the recent acquisition activities of Gannett, and believe that such steps would aid the company to focus more on Digital Media.

Jun 1, 2017

Overview

Gannett Co., a diversified publishing conglomerate, which retained the name of the parent company, started trading as a separate entity upon completion of its spin-off on Jun 29. The company operates as a multi-platform news and information company.

Gannett will now derive its revenue from print and online advertising, and circulation. Publications of the division consist of about 92 daily newspapers and related digital platforms, in the U.S. and Guam, including over 400 non-daily local publications in the U.S. and more than 150 in the U.K. The company’s principal publications include Newsquest, a regional news publisher in the U.K. and USA TODAY, a flagship newspaper brand in the U.S. It also provides commercial printing, newswire, marketing and data services.

The firms identified the following issues as critical to an evaluation of the investment merits of Gannett:

|Key Positive Arguments |Key Negative Arguments |

|Efficient management: The two companies will have separate management teams |Cyclical business: Gannett’s business is relatively cyclical and its earnings|

|and individual decisions of any one will not hamper the performance of the |growth may be constrained or adversely affected by a difficult economic |

|other, henceforth. |environment. |

|Strong brand recognition: The company has strong brand recognition, |Pressure on margins: A faster-than-expected increase in the price of |

|particularly with its flagship daily, USA Today. |newsprint could adversely affect the company’s expected cash flow and |

| |operating margin. |

| |Difficult ad environment: The current advertising environment is mixed. |

| |Moreover, advertisers and readers are migrating from print to the Web at a |

| |faster-than-expected pace. |

Jun 1, 2017

Long-Term Growth

The publishing industry is relatively cyclical and volatile. It faces growth constraints with continuing macroeconomic headwinds. The faster-than-expected migration of advertisers and readers from print to the Web is a major risk for the industry. Revenue trends in newspaper companies in general remain challenging. Moreover, the deteriorating trends in the U.K. advertisement market and the ongoing softness in the U.S. continue to weigh on the industry as a whole.

Gannett retained all the publishing operations, whereas TEGNA has taken over all the broadcasting and digital operations of the company. Gracia Martore, Gannett’s former CEO, has become the CEO of TEGNA, while Robert Dickey, former President of Gannett U.S. Community Publishing, has become the President and CEO of the new Gannett after the separation. The new Gannett, has started trading under the ticker symbol “GCI”.

A significant presence in digital and print publications, along with the flagship brand, USA TODAY, and News Quest, the UK publishing unit, positions Gannett well to undertake significant efforts to establish itself as the next-generation media mogul. Management informed that Gannett will be financially sound enough to take innovative steps and make strategic buyouts. Management further asserted that a virtually debt-free balance sheet would assist the new company in undertaking shareholder-friendly moves.

Firms believe that the decision to separate Publishing from the Broadcasting and Digital businesses will help to better harness the potential of both businesses as the two firms will have separate management teams and a much more defined capital structure. This will provide ample room to take strategic decisions related to any investment, acquisitions or new endeavors beneficial for the particular business, and in no way affect the other entity.

Gannett is realigning its cost structure and streamlining its operations to increase efficiencies and safeguard its earnings and cash flows from dwindling print advertising revenue. The company is focused on improving its digital business, while aiming to lower dependency on soft print media business and traditional advertising.

In sync with this trend, Gannett invested an undisclosed amount in Digg, a digital media company. Gannett acquired Journal Media Group, the owner of the Milwaukee Journal Sentinel and other newspapers. The company recently completed the buyout of leading golf publication, Golfweek.  In Jul 2016, Gannett completed the acquisition of North Jersey Media Group Inc., and in August, the company concluded the buyout of digital marketing solutions company ReachLocal, Inc. Gannett also acquired SweetIQ Analytics Corp., provider of location and reputation management Software-as-a-Service solutions, which will help expand ReachLocal's portfolio of products.

The firms believe that the recent acquisitions made by the company will generate cost synergies over the long term.

Jun 1, 2017

Target Price/Valuation

|Rating Distribution |

|Positive |33.33%( |

|Neutral |66.67%( |

|Negative |0.0% |

|Avg. Target Price |$11.50( |

|Maximum Target |$17.00( |

|Minimum Target |$9.00( |

|No. of Analysts with Target Price/Total |4/6 |

Risks to the achievement of target prices include deteriorating macroeconomic trends, competitive pressures from alternative mediums such as the Internet, and the absence of stabilization in newspaper circulation.

Recent Events

On Apr 25, 2017, Gannett reported its 1Q17 results, wherein earnings of $0.14 surpassed the Zacks Consensus Estimate but plunged substantially from $0.36 reported in the year ago quarter. It recorded total revenue of $773.5 million, up 17.3% from the prior-year quarter figure and ahead of the Zacks Consensus Estimate of $762.7 million.

Revenue

Gannett reported total revenue of $773.5 million in the quarter, up 17.3% from the prior-year quarter. The increase in revenue came on the back of the buyout of Journal Media Group, Inc., North Jersey Media Group and ReachLocal, partly offset by fall in print advertising and circulation demand. Excluding the impact of foreign currency translations and selected exited operations, total revenues surged 19.3% from the year-ago period.

During the first-quarter 2017, the company witnessed a 24% rise in advertising revenues to $435.5 million and 7.8% increase in circulation revenues to 283.3 million.

Segment Revenue

Publishing Segment

Publishing segment revenue came in at $694.9 million, up 5.6% from the prior-year quarter. Excluding unfavorable foreign currency translation and selected exited operations, revenue advanced 7.6%. The increase was driven by incremental revenue from Jersey Media Group, North Jersey Media Group and 3.7% jump in digital advertising performance in local U.S. markets. This was partly offset by a 17.7% decline in print advertising. Digital advertising revenue increased 8.3% to $94.6 million during the quarter.

ReachLocal Segment

ReachLocal segment revenue came in at $77.6 million during the quarter. Gannett has started introducing ReachLocal in several markets. During the first-quarter of fiscal 2017, the company acquired SweetIQ that would function as a part of ReachLocal.

Guidance

Gannett reiterated its revenue forecast of $3.15–$3.22 billion.

Margins

Adjusted EBITDA declined 13.3% to $69.7 million, whereas adjusted EBITDA margin contracted 320 basis points to 9%.

Selling, general and administrative expenses for the quarter increased 28.6% y/y to $212.7 million. Also, total operating expenses for the quarter went up 26.8% to $772.4 million.

Guidance

Gannett raised its full year adjusted EBITDA projection by $30 million to a range of $355–$365 million.

Earnings per Share

During the first quarter fiscal 2017, the company posted adjusted quarterly earnings of $0.14 a share, which declined considerably from the $0.36 reported in the year-ago quarter. On a GAAP basis, the company reported loss of $0.02 a share compared with earnings of $0.33 posted in the prior-year quarter.

The total number of diluted shares outstanding in 1Q17 was 115.3 million, down 3% from 119 million in 1Q16.

Aug 12, 20

|Research Analyst |Vidya V Nair |

|Copy Editor |Saswata Sinha |

|Content Ed. |Rajani Lohia |

|QCA |Sumit Singh |

|Lead Analyst |Sumit Singh |

|No. of brokers reported/Total |6/6 |

|brokers | |

|Reason Update |Earnings Update |

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Jun 1, 2017

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