Good News for Gannett

 | Dec 07, 2011 | 1:00 PM EST  | Comments
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It's been nice to see newspaper publisher Gannett Co. (GCI) showing a little life lately. In fact, shares are up more than 50% since late September, but I'm not jumping for joy because of that move. The stock is still down more than 13% year to date, and is viewed by many as a "buggy whip" -- a reference to an industry that died when automobiles became the preferred method of transportation, displacing horse-drawn buggies and, ostensibly, the whip used to keep horses moving.

The newspaper business is apparently going the same way, which puts Gannett in extinction mode. I know of one well-known investment newsletter that has Gannett listed with a few other companies under the category of "Victims," with a description of "obsolete." That sentiment is the reason the company trades at 6x trailing earnings; 4x enterprise value to earnings before interest, taxes, depreciation and amortization; and 6x 2012 consensus earnings estimates.

While I can see the logic and the continuing decline in advertising revenues, I'm not ready to declare the newspaper industry, or more specifically Gannett, on the way to extinction. I may end up being the last person who prefers to open up a newspaper each morning rather than getting all my news online (and I get plenty there, too), but I suspect there may be others in the same camp. Furthermore, in Gannett's case, about a third of revenue is generated from sources not related to newspapers, primarily digital and broadcasting, so there is more here than meets the eye.

The company has continued to put up decent earnings numbers since nearly imploding between late 2008 and early 2009, is often ahead of expectations, and still generates a lot of cash, including $2.36 per share in the trailing twelve months through the third quarter. In July, Gannett doubled its quarterly dividend to $0.08 per share, which was the first increase since the dividend was cut from $0.40 in 2009. I viewed the dividend boost as a positive -- a sign that even though business may never get back to where it once was, it is stabilizing. It also shows confidence from management.

There's even speculation that the company may increase the dividend again in the near future, which might be one of the reasons the stock has been heading higher recently (an upgrade to "Buy" from Lazard didn't hurt, either). While the company could handle another dividend increase (even a substantial one given the strength of its cash flow), I'm not yet convinced that it's imminent. I could envision further gradual increases instead of a single monster increase. Keep in mind that in July, Gannett resumed its stock buyback program, and expected at that time to repurchase $100 million in stock the following year.

I'm not suggesting we'll ever see Gannett at $80 per share again, or that the newspaper industry will have a rebirth. But I do believe that the company is in better shape than some perceive it to be, and can continue to generate substantial free cash flow.

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