Gannett (GCI -1.22%), the largest news publisher in the U.S., did not get a warm reception from the market after recently reporting fourth-quarter earnings results for 2021 and providing forward guidance that was softer than investors might have been anticipating. Further, there don't seem to be many analysts covering the stock. On the company's Q4 earnings conference call, only one analyst participated in the Q&A portion.
Ultimately, I think Wall Street is sleeping on this stock and missing the bigger picture. Here's why.
Assessing the fourth quarter
Operating revenue in the quarter totaled $826 million, down close to $50 million from the fourth quarter of 2020, while the company also reported a loss of $0.17 per share. The publishing business accounted for most of the decline in revenue as print advertising continued to struggle in line with industrywide trends. Circulation also struggled from a secular decline.
However, digital trends continued to move favorably. Total digital revenue amounted to $273 million, or roughly 33% of total revenue, as Gannett continues to transition into more of a digital-first model. While the company is guiding for less revenue this year than in 2021, it also expects to report a profit of $60 million vs. a $135 million loss in 2021. Gannett projects that it could also double its free cash flow this year.
Image source: Getty Images.
One thing that might have turned investors off about the quarter is that Gannett has dropped its outlook for digital subscribers in 2025 to 6 million from 10 million. The drop is not a huge surprise to me because it seemed like the 10 million had been a stretch. The company currently has 1.63 million digital subscribers, which is up nearly 49% on a year-over-year basis. Gannett expects to hit 2.2 million digital subscribers at the top end of its range for this year and then expects to grow at a 40% compound annual rate to hit its 6 million target in 2025, which would be no small feat on its own. Gannett CEO Mike Reed did, however, say on the company's earnings conference call that 10 million digital subscribers remains management's long-term goal.
The company is making a lot of progress
Despite not always generating the best quarterly numbers, Gannett has certainly been improving its operations and business model. In 2019, the company completed its merger with New Media Investment Group to become the largest news publisher in the country. It gave the company a lot of scale, but it had to take on a lot of debt to complete the deal, mainly a five-year senior secured term loan facility of nearly $1.8 billion.
The loan came with an interest rate of 11.5%. But Gannett took advantage of the ultra-low-rate environment that resulted from the pandemic to refinance a big portion of that debt, which now carries a blended interest rate of 5.82%. Furthermore, Gannett has been making progress in paying off the debt, which is now down to $1.37 billion. As a result of its improving debt situation, Gannett recently authorized a $100 million share repurchase program for this year, which is currently equivalent to roughly 14% of the company's market cap.
"We believe the years of the most significant cash burdens, including cash interest, cash pension cost, cash restructuring, and integration payments as well as interest expense are behind us. And as such, we expect free cash flow to continue to materially increase going forward," Reed said.
Gannett continues to diversify its revenue and create more of a modern media company. Revenue from its events business, which is called USA Today Network Ventures, grew 7% in the fourth quarter on a year-over-year basis despite a heavier reliance on virtual events due to the omicron variant outbreak in the fourth quarter. Gannett also has a digital marketing solutions business, which provides small and medium-sized businesses (fewer than 50 employees) with a cloud-based platform to manage all of their marketing needs. Since late 2020, client count in that business has bounced around a bit but is up nicely and monthly average revenue per customer came in at over $2,400 in Q4.
Gannett also signed what could be a very lucrative deal with the German sports betting company Tipico to advertise the company's betting platform across its media properties. Gannett will receive $90 million in media spend over the five-year deal as well as referral fees every time someone signs up for Tipico through a Gannett publication. Reed has previously said the deal could be worth hundreds of millions in referral fees over its life.
Buy before Wall Street wakes up
The market has likely turned its back on Gannett because of broader trends in the newspaper business, the heavy debt burden, and further difficulties from the pandemic. But as Reed said, the biggest challenges from the debt situation are in the past. The majority of Gannett's debt is now attached to a fixed interest rate, which will be helpful as the Federal Reserve hikes its benchmark overnight lending rate. Furthermore, management is making progress in its transition over to a digital-first company with diverse revenue streams.
Free cash flow and profits are expected to rise significantly this year, and management has signaled to the market with the share repurchase program that it thinks the stock is cheap. With the stock trading at just 0.22 times forward revenue and 1.8 times forward adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), I would have to agree.
