The traditional print newspaper business is a dying industry, and even the digital media space is not so easy to successfully navigate.
For this reason, it's not a huge surprise to see that Gannett (GCI 2.00%), the largest newspaper publisher in the U.S. and the parent company of USA Today, has struggled in recent years. Issues in the news business have also been exacerbated by the pandemic and the ultra-high inflationary environment, which has brought the stock to extreme lows.
While there's still a lot of work to do, Gannett is making progress at getting its financial affairs in order and transforming its business from an old, out-of-date print model to a more modern digital media business. With the stock off roughly 65% this year and trading at a beaten-down valuation, it's time to buy. Here's why.
Reducing debt
In 2019, New Media Investment Group, another big regional and local newspaper publisher, acquired Gannett (but kept the name) in order to add scale to the business -- local and even big regional papers have had trouble staying in business.
Image source: Getty Images.
In doing so, Gannett took on a lot of debt through a massive $1.8 billion term loan to help make the deal happen. At the time, I am sure a lot of investors worried that the company would simply drown in debt. But since the end of 2019, Gannett has paid down $440 million of that debt by cutting costs and selling real estate.
Furthermore, management made the smart move during the ultra-low interest rate environment in 2020 and 2021 to refinance its remaining debt from an 11.5% interest rate to a blended 5.82% interest rate, significantly saving itself on future interest payments.
Gannett still has more than $1.3 billion of outstanding debt, but the company has made meaningful progress on paying it down and should accelerate these efforts as it begins to grow free cash flow.
A clunky print business
The problem with Gannett is obviously that it has a huge print business that readers are not only turning away from but is also clunky and expensive.
If you look at the first nine months of 2021 versus the first nine months of this year, print advertising is down 13% and print circulation is down 16%. The inflationary environment has made things worse, with management estimating that costs are up $29 million in the third quarter on a year-over-year basis due to higher costs associated with distribution, newsprint, fuel, utilities, and materials.
This has led management to start cutting costs and closing print publications that aren't profitable. Gannett's current cost reduction program, which is significantly impacting employees, is expected to generate $200 million to $240 million in annual cost savings, most of which will be realized in the fourth quarter and next year.
Transitioning to digital
The good news is that Gannett continues to grow the digital side of its business. It has almost 2 million paid digital subscribers now, and digital circulation revenue is up 33% in the first nine months of 2022 compared with the same period in 2021. Total digital revenue at the company in the third quarter made up close to 36% of total revenue.
Consider that in the third quarter Gannett added 116,000 net new paid digital subscribers and its average revenue per active user (ARPU) in Q3 was nearly $6. The New York Times Company (NYT 1.54%) in the third quarter added 180,000 net new digital subscribers and had an ARPU of $8.87.
Gannett also saw the number of registered users on its site grow to 5.4 million, which is up 49% year over year. Historically, 10% to 15% of these users convert to paid subscribers within 180 days of registering, according to management.
But even better than the growth of digital subscribers is Gannett's crown jewel, its digital marketing solutions (DMS) business. DMS is a software advertising business for small- to medium-sized businesses that helps them do everything from building a website to marketing, search engine optimization, and data analytics. In Q3, DMS generated record revenue of nearly $119 million. ARPU is over $2,500 and customer retention is excellent, meaning a lot of this is recurring revenue. The margins on DMS are also very attractive.
A very attractive valuation
Gannett has a lot of work to do, including adding more digital subscribers and paying off debt. The company is also battling high expenses due to inflation, and employees are clearly not happy with the layoffs, which have been ongoing for years.
But Gannett currently trades below a $300 million market capitalization and is expected to generate as much as $3 billion of revenue and $300 million of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) this year.
It was only just over a decade ago when the New York Times Company had close to $1 billion of debt and was starting to embark on its digital transformation. Now, the company has nearly 8.6 million digital subscribers and a $5.6 billion market capitalization. Gannett already has 2 million digital subscribers and an excellent DMS business.
I don't think anyone expects Gannett to be the next New York Times, but it doesn't have to for the stock to turn into a multi-bagger investment from its current level.
