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Risk Reward Balances Gannett

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We maintain our long-term Neutral recommendation on Gannett Co., Inc. (GCI - Free Report) with a target price of $27.00.

Why the Reiteration?

Tough economic conditions, along with softness in advertising demand have been weighing upon the company’s performance. This was evident from the company’s recent second-quarter 2013 results, which were not too impressive as the top line remained almost flat, while the bottom line increased in the low single-digit range.

Consequently, the company is trying every means to counter an unstable market and has been contemplating new revenue generation avenues.

Advertising, which remains a significant source of revenues, is largely dependent upon the global financial health. We observe that Gannett’s total publishing advertising revenue fell 5.3% during the second quarter, following a decline of 4.5% in the first quarter. Other publishing companies such as Journal Communications, Inc. , The E.W. Scripps Company (SSP - Free Report) and The New York Times Company (NYT - Free 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 downturns. The company is also adapting to the changing face of the multiplatform media universe, which currently includes the Internet, mobile, tablet, social media networks and outdoor video advertising in its portfolio.

Gannett initiated a subscription based model, commenced Digital Marketing Services in some of the 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 20.1% to $374.3 million during the second quarter, driven by revenue gains in digital advertising and marketing solutions as well as sustained rollout of the all-access content subscription model.

The publishing industry has long been grappling with sinking advertising revenues. 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 counter the shrinking advertising revenues and to 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 of the stock, Gannett carries a Zacks Rank #3 (Hold).

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