Money does not grow on trees, but may be hidden in the bushes. You have to work for it. In this analysis, I am going to point out a non-obvious "dollar for fifty cents" opportunity. No guarantees obviously, as investing is a game of probabilities and there is risk involved.
This opportunity is with Gannett Co. Inc. (GCI, Financial), which is a subscription-based media and marketing solutions company that focuses heavily on digital platforms. Following its acquisition by New Media Investment Group in 2019, it became the largest newspaper company in the U.S.
Gannett operates through two segments: Gannett Media and Digital Marketing Solutions. The former owns local media organizations across 46 states, including USA TODAY and over 250 local daily newspapers, while the latter offers digital marketing services such as LOCALiQ. Despite efforts to transform its business model for sustainability, the company is currently experiencing volatility as it undergoes restructuring.
The Digital Marketing Solutions segment is growing, but Gannett Media still contributes 88% of the revenue. There is the possibility of spinning off Digital Marketing Solutions as a separate entity, potentially commanding a higher valuation alone than the combined company. This will be discussed further.
Gannett's move toward an all-digital future mirrors similar successful transitions by other newspapers like the New York Times and Washington Post. These companies have proven that newspapers do not have to involve paper.
The Digital Marketing Solutions segment offers LOCALiQ, a cloud-based platform distinguished by its marketing automation and management tools, artificial intelligence bidding engines, omnichannel advertising optimization and customizable reporting featuring integrated third-party platform data. Additionally, this segment produces specialized publications catering to local market interests, covering areas such as recreation, sports, health care and real estate. Gannett offerts its solutions across 43 states.
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The company's stock has been declining for nearly a decade now. However, note Gannett was acquired by private equity and restructured in 2019, retaining the Gannett name. It is really a new company circa 2019. The stock is quite volatile as the company restructures.
Debt on the balance sheet
A concern stock investors have about Gannett is the large amount of debt the company has on its balance sheet. The company carries a lot of debt, but is paying it down rapidly, as seen in the chart below. The long-term debt is displayed through the purple part of the stacked bars below. Gannett has paid down about $700 million in debt over the last four years.
Gannett is able to do that because of the high cash flow it is able to generate from its restructuring efforts, which includes freeing up working capital as it transitions from asset-heavy printing to asset-light digital as well as selling off non-core businesses. As Gannett pays down debt, value should accrue to the equity holders.
The company's debt currently consists of the following:
September 30, 2023 | Principal balance |
| In millions | |
| Senior Secured Term Loan | 360.3 |
| 2026 Senior Notes | 305.6 |
| 2027 Notes | 485.3 |
| 2024 Notes | 3.3 |
| Total debt | 1,154.5 |
| Less: Current portion of long-term debt | (69.3) |
| Non-current portion of long-term debt | 1,085.2 |
Valuation
The GuruFocus Valuation Chart shows signs of great value. No guarantees, but Gannett can be multi-bagger from here.
Hidden assets
Gannett has some non-obvious hidden assets, which I highlight below. If monetized, these could have a transformative effect on the company. Think of these as "lottery tickets," which you get for free if you buy the stock.
Currently the value of the Digital Marketing Solutions segment is buried within the low valuation being accorded to the whole company. If DMS was to separate itself from Gannett, it could command a much higher valuation. A similar standalone company called Yext Inc. (YEXT, Financial), with sales of about $400 million, commands an enterprise value of about $600 million. The DMS segment alone has sales of around $475 million. Based on Yext's enterprise value, I think that if this business is sold Gannett should be able to get about $500 million from it. Gannett as whole has a market cap of less than $300 million. By this logic, it looks like Gannett is highly depressed, mainly due to the large debt it is carrying.
Lawsuit versus Google
Gannett filed a lawsuit against Google in June, alleging violations of antitrust and consumer protection laws that led to significant losses in its advertising revenue, amounting to billions of dollars. The lawsuit aligns with a case filed by the Department of Justice and 34 states, which is set for trial in March.
The company is represented by Kellogg Hansen, a reputable antitrust law firm. Speculation suggests Google might settle with the DOJ, establishing liability and increasing the likelihood of a substantial settlement with Gannett, potentially reaching up to $1 billion. Even a fraction of this amount could significantly impact Gannett's financial position. Further developments are expected in the next year or so, particularly if Google aims to avoid a trial.
Noteworthy numbers
An interesting number to note from the Gannett summary page is the very low price-to-owner earnings ratio of 3.50. Owner earnings is a cash flow concept introduced by Warren Buffett (Trades, Portfolio) in his 1986 Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) letter to shareholders. At that time, companies were not required to produce a cash flow statement, nor was stock-based compensation such a big concern. Buffett's formulations of owners earnings removes non-cash distortions from earnings to focus the investor's attention on how much cash they are getting as partial owners of the company at the end of the period.
Buffett explained owners earnings as follows: Owner earnings equals net income plus depreciation, depletion, amortization and other non-cash charges minus average annual maintenance capital expenditures. Owners earnings is similar to free cash flow, but I think a superior metric because it starts from net earnings, so takes stock-based compensation as well as maintenance capital expenditures into account, which free cash flow does not. Unlike free cash flow, owner earnings includes stock-based compensation and maintenance capital expenditures, which can be a significant expense for some companies.
Owner earnings per share (TTM) for Gannett | |||||
| Dec 19 | Dec 20 | Dec 21 | Dec 22 | TTM | |
| 0.524 | -2.84 | -0.193 | 0.439 | 0.52 | |
Another interesting number to note is the very high shareholder yield of 27.63%. Shareholder yield is the sum of the dividend yield, buyback yield and net debt paydown yield.
First, the dividend yield is how much a company has paid back in dividends divided by the company's market capitalization. It puts money right back in our pocket, but is subject to taxation by the government as it is considered income.
Second, the buyback yield is the value of shares the company has bought back in the last 12 months divided by a company's market capitalization. Stock buybacks are good for existing stockholders in that they reduce the total number of shares outstanding. Simple logic will tell us that, whatever value you place on a company and the fewer shares that are out there, the more each share is worth.
Finally, the debt paydown yield is the change in average of four quarters of long-term debt over a company's market cap. Debt reduction is also intuitively a good thing. Debt reduction means the company has its act together. It is generating enough cash flow that it can reduce total debt. The less you owe, the lower your interest expenses and more value is left over for equity holders. Companies that have high debt paydown yields indicate they are rapidly paying down debt.
As explained above, Gannett has been rapidly paying down debt, thus delivering value to shareholders, resulting in a high shareholder yield.
Shareholder yield for Gannett
Dec 19 | Dec 20 | Dec 21 | Dec 22 | TTM |
| -35.17 | -217.25 | 46.82 | 38.28 | 27.63 |
Conclusion
Gannett can be considered a consolidator in the local news media industry. Through various acquisitions and mergers, over the years Gannett has expanded its presence and became the largest newspaper company in the U.S. However, in the process, it has accumulated a large amount of debt, which it is rapidly paying down through its robust cash flows. If successful, this strategy, which is modeled on the private equity playbook, can accrue big gains to the equity holders. It also holds a couple of lottery tickets, which I have highlighted above.
Another thing to note is one of the large debt holders, Apollo Global (APOL), one of the leading private equity organizations, is also the second-largest shareholder of the company. Apollo is very savvy operator and if Gannett was at high risk of insolvency (as the stock price suggests), I doubt the firm would have taken an equity position. It obviously expects the company to survive and thrive given its dual position in the company's capital structure.
Insiders are also buying stock, which is a good sign.
The company owns numerous local media organizations across the U.S., including well-known brands like USA TODAY and over 250 local daily newspapers. This consolidation of media assets allows Gannett to have a broad reach and diverse portfolio, positioning itself as a significant player in the industry. Additionally, the company's move toward digital platforms and the development of its Digital Marketing Solutions segment further reflects its efforts to adapt and consolidate its position in the evolving media landscape.
