Gannett owns newspapers (such as USA today) and tv stations, mostly in the US. These industries are much hated by investors today, as revenues are generally in decline; advertising dollars are migrating online as circulation and viewership of traditional media continues to decline. But for value investors, this negativity can create an opportunity.
Gannett trades for just $2.8 billion despite having generated free cash flow of about $800 million in each of the last three years. So far this year, that trend looks set to continue or even improve, as through six months the company has generated some $400 million in free cash flow.
But as is the case with many companies in this industry, a potential risk to shareholders is a rather large debt burden. To the company's credit, however, this debt burden has been on the decline. In early 2008 it was over $4 billion; today, it is likely under $2 billion! This speaks volumes about Gannett's ability to generate cash: it was able to pay off $2 billion worth of debt in 3.5 years, while at the same time investing enough in its business to maintain current cash flows.
If the company can maintain this level of cash flow for a few more years, shareholders who buy in at this price will make a fortune. The question of course is whether the company will be able to do that, as Mr. Market seems to believe otherwise. Debt levels have a way of looming large over companies in declining industries, as fixed debt payments have to be serviced by lower revenue in-take. Nevertheless, for those who believe the rate of demise of these industries is over-exaggerated, Gannett may be an attractive investment.
The question investors should ask themselves is whether they are comfortable with the company's debt level. While it would only take 3-4 years to pay down completely at the company's current rate of cash generation, if advertising spend accelerates away from Gannett's newspapers and tv stations, it could take much longer.
Buying a company in a declining industry can be done successfully. But the investor should be sure to understand the risks of such an investment, particularly when they are magnified by a significant debt balance.
Disclosure: No position