Gannett Shows More Signs of Life

 | Jan 23, 2012 | 12:30 PM EST  | Comments
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It's gratifying to see companies come back to life. After all, the hunt for value, at least in my view, is not just about making money. It's also about identifying names that few want to touch, names that have all but been declared dead, taking a stand, and ultimately being proven correct.

It does not always work out that way, for sure -- hence the term "value trap." But when it does work, it can be very satisfying. Part of being successful with a given name that's in some form of distress is for other investors to discover the potential value that your analysis has revealed, and begin buying.  

When it does not work and your analysis turns out to be flawed, it can be painful, and the situation can drag on for years as you patiently wait for your investment thesis to play out. That is one of the value investor's great dilemmas: knowing the difference between patience and stupidity, and knowing when to pull the plug on what seemed like a great idea. While experience and taking a few lumps can help you to improve, there will always be mistakes. You just have to try and learn from them.

Gannett (GCI) is a great example of a company that has come back to life over the past few years. The company was all but written off for dead in early 2009, but its presumed death was prematurely called. All the signs were there, terrible industry, loads of debt, deep recession, but things were not nearly as bad for this company as the market believed. Gannett wisely used the time to strengthen its balance sheet, extend debt maturities and reduce debt.

Since then, the company has put up some pretty decent numbers, more often than not exceeding expectations, and it continues to generate significant amounts of free cash flow. The stock's path has not been straight up, however, as investors have continued to grapple with the value of what is perceived as a newspaper company in a dying industry.

Shares ran from less than $2 in March 2009 to more than $18 in April 2010. This past September, shares had fallen all the way to $9.00, still a nice gain off the 2009 low. Since then, Gannett has risen 70%, hitting a 10-month high this past Friday, and it is up 15% year to date.

Certainly, the overall direction of the market has been a boost, but so has the doubling of the dividend over the summer. This sent a strong signal of confidence, and it appears that there's room for future increases. With the dividend increase, Gannett yields a respectable 2.1%.

Gannett is currently trading at 7x trailing earnings, 6.5x trailing free cash flow and 7x 2012 consensus earnings estimates. Clearly, this company no longer deserves a 15 multiple, but 7x earnings reflects continued skepticism.

While I don't focus too much on a single quarter's earnings release, in Gannett's case it's a good opportunity to measure progress. The company will report next Monday, prior to the market open. Consensus estimates for the fourth quarter are calling for revenue of $1.39 billion and earnings per share of $0.69.

This could get more interesting.

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