We reaffirm our long-term Neutral recommendation on Gannett Company, Inc. (GCI) that also retains a Zacks #3 Rank (Hold) status. 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 generating 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 publishing advertising revenue fell 6.6% during the third quarter of 2012, following a decline of 8.1% in the second quarter.
Tepid recovery in the economy along with weakness in advertising demand in the U.S. and U.K. impacted the results. Advertisers are shying away from making any upfront commitments in an unsettled economy.
As a result, Gannett is repositioning itself to diversify its business model by adding new revenue streams in an effort to make it less susceptible to the economic conditions. The company is also streamlining its cost structure, strengthening its balance sheet and restructuring its portfolio. Alongside, it is focusing on subscription based model and Digital Marketing Services products.
The company remains well positioned to tap the opportunities of the rapidly changing business model such as digitalization in order to keep itself on the growth path. The company recently provided an update of its growth initiatives and stated that its long-term objective is to attain an annual revenue growth of 2% to 4%.
To achieve this, the company is focusing on its subscription based model and Digital Marketing Services products. Management expects U.S. Community Publishing division’s subscription revenue to increase by 25% by the end of 2013, which would translate into a contribution of approximately $100 million to operating profit. For 2012, total digital revenue is projected to come in at $1.3 billion, up 19% from 2011, whereas retransmission revenue is expected to reach $96 million, escalating 20%.
Based on the above, Gannett now forecasts total revenue growth of over 5% and earnings in the range of 87 cents to 88 cents for the fourth quarter. The current Zacks Consensus Estimate for the quarter is 88 cents a share that dovetails with management’s guidance range.
Other Stocks to Consider
Other stocks in the publishing sector that look promising are Lee Enterprises Inc. (LEE - Snapshot Report), which holds a Zacks #1 Rank (Strong Buy) and The McClatchy Company (MNI - Snapshot Report), which holds a Zacks #2 Rank (Buy).