Behold the grand old newspaper. Giver of information and entertainment, employer of the young and motivated, provider of liner material for litter boxes 'round the world. And one of the more potentially controversial places for value investors to gather and discuss. At times it seems like you run the risk of losing your special value-investor decoder ring if you don't like newspaper stocks, but other times, it seems like there are at least a few good reasons for the stocks to be weak.
In the case of Gannett (NYSE:GCI), known mostly for its USA TODAY but a publisher of many other local newspapers, I say . it's a value. I think. Maybe.
Results for the third quarter certainly won't attract the earnings-momentum folks. Reported revenue was up 6.5%, though adjusting that to a pro forma basis (to more realistically treat the consolidation of Detroit operations) reduces it to negative 0.5%. Likewise, earnings were nothing to get excited about -- operating expenses were up (whether as reported or pro forma) and earnings from continuing operations came in a bit shy of last year's level.
It's not all bad news. True, pro forma ad revenue was down nearly 2%, but the losses were more moderate on a constant currency basis (actually up in classifieds), and pro forma U.S. ad revenue was up 1.5%. That said, ad revenue at USA TODAY was down more than 4%, and major traditional advertisers like auto companies Ford (NYSE:F) and General Motors (NYSE:GM) still have their problems.
Oh, and the broadcasting business also did well this quarter -- boosted by the Olympics, which apparently some people watched after all. Unfortunately, broadcasting is only a drop in the bucket here.
Running a valuation on this company, it could be a value. I say "could" because my cash-flow-growth assumption in the mid-single digits could still prove aggressive. You could also argue that instead of getting a better discount rate because of the wide moats of newspapers, I should in fact raise the discount rate because of the threat of Internet competition.
As it stands now, though, I think Gannett is a modest value, along with Tribune (NYSE:TRB). I personally see more value in Journal Register (NYSE:JRC) and less in New YorkTimes (NYSE:NYT) and Dow Jones (NYSE:DJ), but reasonable people can always disagree on the growth and discount rate assumptions that lead me to those conclusions.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). Though he wears his value investor ring proudly, he'd really rather have one of those nifty Green Lantern rings.
