The BMW Method
Gannett (GCI) Analysis

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By TwinDeltaTandem
May 30, 2006

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GCI is a stock that came up on Greenblatt's screen awhile back (and is still there, depending on the parameters used). I thought it might make a good case study for me to try and get a handle on the BMW method (I noticed from some previous BMW posts that it is not exactly a favored stock on this board. I find myself to be far more optimistic, but am interested in having my analysis shot at).

GCI (Gannett) is trading below approx -3 RMS, with 1-yr return of 105.1%, if the stock returned to its mean CAGR:

Piotroski: 6. Areas that failed to score were Net income to total assets growth, current ratio improvement, and gross margin growth. F_Score improved from 5 due to an improvement in asset to long-term debt ratio.

GCI has a long history of a steadily improving annual low. Its current price of 53.85 is slightly higher than its 52-week low of 53.76, and represents a low since 2000.

Graham's criteria:

  Current ratio is 1.29, well short of Graham's minimum of 2.0.�
  Long-term debt exceeds working capital.�
  The company has made money� each of the past 10 years.
  Gannett has paid dividends every year since� 1929, and has increased dividend payments 35 times during that period.
  EPS� has increased from 3.35 to 4.99 over the past 10 years: this is a 48% increase, well above Graham's 33% threshold.
  The P/E is 10.9, well below G's 15, as� well as the 27.1 industry average and 21.4 S&P 500 average.
  Price to� book is 1.7, just higher than Graham's max of 1.5. However, price to book times p/e is 18.5, which is well below Graham's max of 22.5. Overall, given the inflation of price to book ratio's since Graham's day, these numbers indicate a very reasonable price for the stock.

Due diligence:

As is mentioned on the boards whenever GCI is discussed, management identifies competition from alternative media over advertising dollars as a primary source of uncertainty in the future. Their stated strategy is designed to address this challenge:

� delivering customer satisfaction and expanding our customer base by raising the standards for and enhancing the quality of our products;

� making acquisitions and investments in news, information and communications and related fields that make strategic and economic sense that leverage our existing assets; and

� capitalizing on opportunities presented by changing technologies to expand our information and advertising businesses.

GCI relies on broadcasting revenues in addition to print media. However, despite the fact that this would presumably be a segment in which competition for advertising would be less critical than print, their success in broadcasting seems to lag that of print. Print revenues and circulation are both increasing strongly, at what would appear to be a steady compounded rate, whereas broadcasting revenues are inconsistent (though still profitable). Decreases in broadcasting earnings are the reason we see the red flags in the F_Score. Note: publishing is by far the largest business segment for GCI, and accounts for the vast bulk of its income, cash flow, asset base and capital expenditures.

Short-term paper coming due and being refinanced at higher interest rates will result in a worsening debt situation. Unless broadcasting revenue improves (which it will, based on expected revenues related to the Winter Olympics, but I don't know by how much), debt to long-term assets will likely continue to be an issue. (By the way, so far the expectation that Winter Olympic ad revenue would be strong has held out�see conference call transcript at

As mentioned earlier, dividends have been steadily increased by GCI for a long time. In fact, the dividend has been substantially increased every year since '96. However, the total cost of dividends to the company was $273M in 05 versus $274M in 04 despite a dividend increase from $1.04 to $1.12. This was due to a decrease in shares outstanding. Furthermore, the ESOP uses cash to purchase shares of stock on the open market rather than covering obligations through the issuance of new shares. The company's finances seem to be managed very conservatively, despite some slight concerns we might have over debt and current ratio (e.g., the company is not involved at all in the derivative markets or foreign currency markets (other than what is required for primary operations in U.K.)). I think this all paints a picture of a management very much interested in promoting shareholder wealth! There is evidently a strong culture of concern for the shareholder at GCI which is not all that common today. Stock repurchase at GCI is based on whether GCI stock is seen to be a better investment than other opportunities versus using it as a tool to manipulate stock prices near the tops of their runs.

The economy in the U.K. also seems to be a major source of softness in overall results. However, there is a fairly strong confidence that this will ease by the end of this year (the U.K. historically sees about an 18 month cycle, which is nearing its end. Also, there is indication from the housing market that the U.K. economy is recovering. Of course, these are uncertain times for us all, and the U.K. is in the thick of it).

Insider trading is mixed, but there's plenty of open-market buying over the past couple of years at prices up to around $80.

Analyst opinion is generally positive, mostly weighted at "hold," with several analysts recommending "buy" or "strong buy." One analyst recommends "sell." Since June there have been no positive changes in analyst recommendations.

Looking at a recent conference call, I think this is a pretty good summary of the current situation with the company:

Dan Jenkins, State of Wisconsin Investment Board
Good morning. Kind of following up on Rob Shipman's question, I know your credit metrics have weakened quite a bit from a year ago like your operating cash flow coverage is down to about 7.5 times from 11.4 a year ago and your balance sheet leverage is obviously as well. I guess my question is how much further would you see yourselves pushing those metrics given the fact that your share prices are at a four-year low and as acquisition opportunities present themselves, would you spend an excess of free cash flow given those in a way you're set right now?

Gracia Martore, Senior Vice President and CFO
Well, I think as we've done historically, when we have seen investment opportunities that we believe will add significant value to the company and to our shareholders and also our bond holders, then we will leverage up the balance sheet as we did, as I mentioned, in 2000-2001, as we did frankly back in 1995 when we did the multimedia acquisition, but then we are very focused on paying down the debts because, again, as we have consistently said, we very much want to be a strong investment grade company, and so we will continue to be focused on balancing all of those factors � acquisition, share repurchases, and the like, to continue to maintain our profile as a strong investment-grade company. But from time to time, we will lever up a bit and then if you look at our 15-20 year chart, historically we've been focused on bringing the debt down and then we'll re-lever again if the right opportunity and right investments come along.

Dan Jenkins, State of Wisconsin Investment Board
I guess my follow-up would be, what would be the higher priority for use of your cash given the way your share prices, would it be share buybacks or would it be US paper acquisitions or UK paper acquisitions or perhaps broadcasting, is there any area that you see as maybe a higher priority for your cash currently than another?
Gracia Martore, Senior Vice President and CFO
The highest priority would be to bring the best results to the company, and we're fairly agnostic as to whether that's in the UK or the US or it's in newspapers or broadcast or on the digital front. Whatever will create the most value for our shareholders is where we are interested in investing, as it has been for the last early something years that Doug has been at the company and continues to be. So, we'll just keep that same discipline and that same focus going forward.

Douglas H. McCorkindale, Chairman
Dan, we'll just go where we can make the most money for the shareholders. There's a whole series of opportunities out there and we don't say we have to be bigger in broadcasting or bigger in print, we'll go where we can make money. We can broadcasting stations that are not well run or at least as well run as Gannett can do it and make a lot of money, we can buy the Clipper of this world, which we do very, very well, we can do things in the digital world or we can do all of them at the same time to bring the most money to the bottom line and to improve the cash flow, so there's no game plan that you only have to do one.

In other words, GCI is leveraging their strength to buy future capacity in a very disciplined way, taking advantage of market weaknesses. I think the future will include either aggressive stock repurchase or responsible investment in new revenue inlets. Meanwhile, the company will work hard to improve its debt structure.

Is this a perfect investment? Nope. We've identified several areas of concern. However, I don't see a reason to be pessimistic to the point of doom and gloom. GCI continues to be strongly profitable and even to steadily improve revenues despite an increasingly competitive environment.


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