Gannett’s Earnings Beat Doesn’t Mean Much

by Jonathan Berr | February 5, 2013 10:55 am

Shares of Gannett (NYSE:GCI[1]) were pounded Monday even though the nation’s largest newspaper publisher reported better-than-expected earnings. The reason is simple: Beating Wall Street analysts’ forecasts isn’t much of an accomplishment when little is expected to start.

Net income at the McLean, Va., company slumped to $103.1 million, or 44 cents per share, compared with $200.3 million, or 86 cents, a year earlier. Revenue rose 9.4% to $1.52 million. Excluding one-time items, profit was 89 cents — a penny better than forecasts. Revenue also was better than the $1.49 billion analysts had forecast.

Wall Street — which considers Gannett far better-managed than rivals such as The New York Times Co. (NYSE:NYT[2]) — wasn’t impressed. Analysts, such as Ed Attorino of Benchmark Co., noted that the company benefited from a surge in political advertising tied to the presidential election that won’t happen again for another four years. Moreover, there was an extra week in this quarter compared with a year ago.

“The top line was not terribly impressive … Look, there were some factors that made the quarter seem better than it actually was,” said Attorino, who rates Gannett’s shares as a “buy,” in an interview.

Indeed, the underlying numbers for Gannett’s core newspaper business remain as depressing as ever.

Advertising revenue in the company’s publishing business was down 2% to $657.6 million. Excluding the extra week, sales in the quarter were 6.5% below where they were in a the year-ago period — the best quarterly comparison in 2012. But before investors start popping champagne corks, they need to remember that this performance was during the holiday season, where retailers have to advertise to get consumers to come to their stores.

Paywalls and price increases pushed up Gannett’s circulation revenue by 16.8% to $313 million. The company’s TV station business reported revenue of $287.5 million, up 43.9% in the quarter thanks to a surge in political ad spending. The good times for the company’s 23 television stations aren’t going to last. Gannett was hurt by the shift in the Super Bowl to CBS (NYSE:CBS[3]), where it owns few affiliates.

Digital results, which include Gannett’s holdings in CareerBuilder, were also disheartening. That business posted revenue of $187 million, a gain of 3.2%. Internet advertising growth has been slowing, which is pressuring margins of newspaper publishers. Online ad spending increased by 26.7% in 2004, yet only by 6.8% in 2011 as the novelty of web advertising wears off, according to data from the Newspaper Association of America.[4]

Even more depressing for the industry is the fact print advertising hasn’t posted a gain since 2006.

Newspapers will be in world of hurt for a while. ZenithOptimedia is forecasting that spending in the sector will drop 8.8%. Publishers are going to count on circulation for growth, and Gannett is no exception. The company started online subscription programs at many of its papers. It has yielded some results, attracting about 46,000 online subscribers, and plans to boost marketing spending to add between 250,000 and 300,000 additional subscribers by the end of the year.

“They believe the success of this program is going to drive $100 million in earnings by the end of (2013),” said Doug Arthur, an analyst with Evercore Partners, told Bloomberg News. “Everything seems to be on target.”

Even skeptics of the newspaper sector can be impressed with Gannett’s dividend yield, which currently tops 4%. For conservative investors, that might be enough reason to buy.

Otherwise, it might be difficult to justify.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Follow him on Twitter@jdberr.

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