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Gannett Retains Neutral Rec

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The economy, which is still finding its way out of the woods, has been thwarting the growth of publishing companies, and Gannett Company, Inc. (GCI) is no exception. Tough macroeconomic conditions along with softness in advertising demand have been taking the toll. Companies have been shielding themselves from the impact of a wobbly market, as well as 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 global financial health.

We observe that Gannett’s publishing advertising revenue fell 8.4% during the first quarter of 2012, following a decline of 7.1% in the fourth quarter of 2011. Tepid recovery in the economy along with weakness in advertising demand in the U.S. and U.K. 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 8.1% in the first quarter of 2012, as against a fall of 7.1% registered in the fourth quarter of 2011.

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 charging readers for online content. Despite hiccups in the economy, it still promises revenue generation.

News International, the subsidiary of News Corporation (NWSA) started charging readers for the online content of The Times of London and Sunday Times of London from June 2010. The New York Times Company launched a pay-and-read model on March 28, 2011.

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.

Plus Points

Gannett witnessed healthy growth across its Broadcasting and Digital segments during the first quarter of 2012. Broadcasting revenue jumped 7.5% buoyed by robust advertising demand. Television revenue rose 7.9%, whereas retransmission revenue increased 17% during the quarter. Digital segment revenue rose 6.8% due to robust revenue growth at CareerBuilder.

The company is deploying its operating cash to pay down debt and lower its leverage. The company generated net cash flow from operating activities of $162.1 million and free cash flow of $147.7 million in the first quarter of 2012, and lowered its long-term debt by $95 million. Debt to EBITDA ratio at the end of the quarter was approximately 1.7x, providing financial flexibility.

Gannett is also actively managing its capital, returning much of its free cash to shareholders via share buybacks and dividends. During the first quarter of 2012, management increased its annual dividend by 150% to 80 cents a share and announced a new $300 million share buyback program to be completely exhausted in the next two years. During the quarter, the company repurchased approximately 2.4 million shares aggregating $35.5 million.

Closing Comment

Gannett remains committed to streamline its cost structure, strengthen its balance sheet and rebalance its portfolio. However, we remain apprehensive about risks that the company faces due to its high dependence on advertising revenues.

Currently, we have a long-term Neutral recommendation on Gannett. However, the company holds a Zacks #4 Rank, which translates into a short-term Sell rating.

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