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We reaffirm our long-term Neutral recommendation on Gannett Co., Inc. (GCI - Analyst Report) with a target price of $22.00. Tough economic conditions along with softness in advertising demand have been weighing upon the company’s performance. Consequently, the company is trying every means to shield itself from the impact of an unstable market and has been contemplating new revenue generation avenues.
Why the Reiteration?
Advertising, which remains a significant source of revenue, is largely dependent upon the global financial health. We observe that Gannett’s total publishing advertising revenue fell 4.5% during the first quarter of 2013, following a decline of 2% in the fourth quarter of 2012. Other publishing companies such as Journal Communications, Inc. (JRN - Snapshot Report), The E.W. Scripps Company (SSP - Snapshot Report) and The New York Times Company (NYT - Analyst Report) are also encountering a similar setback.
Advertisers are shying away from making any upfront commitments in an economy that is showing an uneven recovery.
Gannett is taking initiatives to diversify its business model by adding new revenue streams in an effort to make it less susceptible to economic conditions. The company is also adapting to the changing face of the multiplatform media universe, which currently includes Internet, mobile, tablet, social media networks and outdoor video advertising in its portfolio.
Gannett initiated a subscription based model, commenced Digital Marketing Services in top markets, and refurbished its iconic brand, USA TODAY to generate new advertising and marketing revenue sources. Gannett acquired Mobestream Media and BLiNQ Media to enhance its Digital Marketing Services. The company has successfully deployed the subscription based model in 78 local publishing markets. We believe that despite glitches in the economy, the subscription based model still promises revenue generation.
Company-wide total digital revenue augmented 28.6% to $350.3 million during the first quarter, driven by revenue gains at digital advertising and marketing solutions as well as sustained rollout of the all-access content subscription model. This includes 76% growth registered in the publishing digital revenue.
The publishing industry has long been grappling with sinking advertising revenue. This comes in the wake of a longer-term secular decline as more readers choose free online news, thereby making the print-advertising model increasingly irrelevant. To curb shrinking advertising revenue and seek new revenue avenues, the publishing companies contemplated charging readers for online content.
In an effort to offset the declining revenue and shrinking market share, publishers are scrambling to slash costs. Gannett has been realigning its cost structure and streamlining its operations to increase efficiencies, and in turn the operating performance.
Given the pros and cons embedded in the stock, Gannett carries a Zacks Rank #3 (Hold).