Gannett: Don’t Be Fooled By An Uptick In Subscription Numbers (NYSE:GCI)

Gannett (NYSE:GCI) is a modern media company that owns several print and digital news brands, including USA Today. Gannett’s stock price has seen a historical tumble in the past few years, driven by the fact that the company took on an insane debt agreement in 2019, and the newspaper industry is slowly on the decline.

(Gannett Co. Stock Market Chart, Seeking Alpha)

Gannett’s Q2 2020 report spilled more trouble

One of the most notable changes in the recent quarterly report is that Gannett wrote down a significant amount of goodwill. A total of around $362M to be exact, down from $914M, which is quite significant considering that this write-down contributed largely to the company’s drop in total asset values of about 17%. $321M of the total goodwill write-down is related to the Publishing reporting unit, which is quite concerning as based on the company’s future outlook, its own acquisitions are expected to see a significant decline in future benefits moving forward (Gannett 10-Q, 2020).

We believe that in the next few quarters, Gannett will continue to write down the current goodwill amount of around $559M. Its goodwill calculations were based on “current and expected future economic conditions (Gannett 10-Q, 2020)” and acknowledged that “the newspaper industry and the company have experienced declining same-store revenue and profitability over the past several years, and these industry trends are expected to continue in the future (Gannett 10-Q, 2020).” This is important given that investors may be deceived by the company’s current asset-to-liability ratio, and we expect to see this ratio decline over the next few years. Tangible assets are much more valuable when trying to consider whether or not a company can take on large loads of debt, and in this case for Gannett, around $1.6B.

(Gannett 10-Q, 2020)

While examining the operating revenues for Q2 2020, investors should not be deceived by the dramatic increase in the revenue figure but should note that overall, same-store revenues actually fell a staggering 28% compared to last year (Gannett 10-Q, 2020). Gannett noted that for June, same-store revenues were only down 24% compared to the prior year, and the company expects this figure to improve in Q3. We believe that same-store revenues will fail to reach 2019 figures for at least another year due to the vulnerable state of the economy.

(Gannett 10-Q, 2020)

We believe that in terms of print media, companies and schools are among the two biggest groups that order print media, and COVID-19 has shifted the desires for these groups to supply print media to its employees or students given the reduced relevant foot traffic in large corporate offices and campuses. Another area for concern is that print media advertising revenues may never recover within the industry as a whole – given the potential permanent shift of consumer demand from print to digital media. Gannett states that “media companies generally charge much lower rates for digital advertising than for print advertising,” suggesting that the companies which are moving more towards digital outlets, such as USA Today, are contributing to their own fall.

We believe that this played a large part in why the goodwill write-down was of such significance, and we do not believe that there will be consistent growth in demand for print media for the foreseeable future. Moreover, less print advertising revenue means much less revenue overall.

One final interesting figure to investigate from the Q2 2020 quarterly report is the accounts receivable figure, which factors in the allowance for doubtful accounts amount. The collection of accounts receivable is of utmost importance for Gannett at this time, given that it has loads of debt to pay off, and that the balance on this asset account is almost double its cash and equivalents account value.

(Gannett 10-Q, 2020)

Gannett acknowledges that companies which owe Gannett money “are primarily retail businesses that can be significantly affected by […] economic downturns and other developments and that may impact our ability to collect on the related receivables (Gannett 10-Q, 2020).”

(Gannett 10-Q, 2020)

$12M of write-offs charge against the allowance is not a nominal figure, and realistically, Gannett will continue to perform write-offs against allowance due to the fact that some retailers aren’t exactly worried about paying already incurred advertising services and are trying to stay afloat themselves.

We believe that Gannett is put in quite a tough situation because although Gannett should continue to investigate high-risk accounts, there is additional pressure to increase revenue figures to pay off debt, which could incentivize Gannett to sell advertising spots to any businesses, regardless of their known history to pay off receivables. This is a no win-win situation, as on the contrary, if Gannett were to advertise to only those with reputable track records, the company might not be able to sell those advertisement spots or impress shareholders with strong advertising revenue numbers. It will be important to continue to monitor the accounts receivable, allowance for doubtful accounts, and write-offs figures moving forward.

Gannett’s theoretical magical return to pre-COVID net income margins will not improve its financial situation

A lot of investors automatically assume that once a company returns to pre-COVID numbers, they would be put in a better position financially given that the pandemic has been such a significant and sudden event. However, Gannett has been struggling to produce solid net income percentages for the last 5 years.

(Koyfin: Gannett Co. Key Financials, 2020)

Gannett’s net income margin has seen a general decrease in the last 5 years, and even went negative for 2 specific years in 2017 and 2019.

We reiterate that these figures came before COVID-19. Even if Gannett achieved its 2019 EBITDA figure of $182.6M, which is virtually impossible for 2020, the company would direct all of its eventual earnings to interest expenses. The eventual sum of money that Gannett will actually use to pay towards its debt from revenue operations is nowhere near $182.6M, given tax implications, and the D&A add-backs. Gannett had a negative net income in 2019 of $119.8M, which is scary considering that again, this was before the pandemic.

Competition is fierce amidst COVID-19, and Gannett has no competitive advantage

We believe that realistically, the majority of consumers who pay for digital news subscriptions are extremely price-sensitive, especially during a pandemic. If USA Today increased its monthly subscription price by simply a dollar (from its current price of $4.99), we believe that the theoretical decline in new potential subscribers would be in the 5-figure range. This is due to a few big reasons, including the fact that free news outlets are popping up everywhere and competitors are always offering short-term trials for reduced prices. We also believe that although USA Today is one of the leading news brands, there is nothing significant about the outlet that gives consumers incentive to continue their subscription based on non-pricing factors. In fact, USA Today isn’t even close to the fastest growing brand during the pandemic – New York Times added 587,000 subscribers in Q1 2020 compared to 41,000 for Gannett. Therefore, it is hard for Gannett to manoeuvre a market in which it is not the market leader, it tends to cover big stories that all other major news outlets cover, and most importantly, it is currently cash-restricted.

This is again a no-win-win situation in terms of Gannett trying to gain market share or long-term competitive advantage with its leading brand USA Today. If Gannett lowers its prices to attract more market share, this significantly impacts its bottom line and worsens its ability to pay its debt. The temporary gain in subscribers would lead other news outlets such as New York Times to offer free/reduced-fee trials in order to gain back that market share. If Gannett keeps the price the same, there would be no momentum moving forward in a post-COVID world. If Gannett raises prices, consumers would switch to another leading media brand or an alternative free one, and Gannett would probably see a drop in overall revenue. Gannett could also spend more on advertising in an attempt to gain market share based on non-pricing initiatives, but the following would lead to an advertising war where every media company is burning cash to either maintain or gain market share. The problem here is that Gannett would be the first to run out of cash.

Gannett’s market capitalization is worth nowhere near its enterprise value

We currently observe that Gannett is doing its best to reduce costs where possible, including selling real estate worth $100M-150M by the end of 2021 and discontinuing brands that have proven to be cost-leaders. We also understand that Gannett has seen a 31% increase in subscription numbers, which could lead to a permanent uptick in demand, given that COVID-19 has given more time for Americans to appreciate journalism as a whole.

Most importantly, we understand that Gannett has a current market capitalization that is close to $200M, whereas its enterprise value is around $2B. This large gap is often seen with companies that are tied down by debt, but given that the company will probably not go bankrupt for the next few years, many investors would be surprised to see the stock go a lot lower. Gannett is quite focused on strategic initiatives, as it just announced a new CFO, who was a former WeWork executive.

In summation, there is no denying the value that Gannett and its brands provide to citizens, but the astounding $1.6B debt figure is quite hard to look past given Gannett’s lack of competitive advantage. It is time to sell.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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