Monday, October 27, 2014

GCI: Another good quarter ...

Yes, Gannett (GCI) remains a value play, as we initially mentioned on 1/27/2014.  After hitting a 52-week high of $35.70/sh, which was 33% higher than when we first pitched it, the stock declined along with the market.  Since then it has recovered partially.  As shown below GCI has outperformed the market (S&P 500) since we talked about it in late Jan. '14.

GCI vs S&P 500 since January 27, 2014

The Company reported impressive Q3 numbers, with EPS beating expectations and top-line coming in in-line.  As we mentioned on 8/18/14, with the spin-off in mid-FY15 and the acquisition of, we upped our valuation of GCI from $40/sh to approx. $44/sh.  So even with after outperforming the broader market, GCI has another 40% upside, in our opinion.  Below is a review of how we value GCI, which was mentioned initially in August.



Regarding, we are assuming low double-digit top-line growth until FY '19.  We plugged in 9% revenue growth for FY '19 and FY '20. revenues' 6-year CAGR (from end of FY '14 until end of FY '20) is approx. 12%.  NADA (National Automobile Dealers Association) is assuming a 4-year CAGR (until end of FY '18) of 17%+ in auto digital ad spending.  We believe NADA's estimates are based on the assumption that affiliate programs will continue to grow, with which we disagree.'s bigger margins will help expand GCI's digital segment margin an average of 300bps per year.  We think GCI's digital EBITDA margin will be between 25% and 27% going forward.  We have assumed a 7.2% 5-year CAGR (ending in FY '20) for total digital revenues.

Given the sizable margin expansion and slightly higher top-line growth that the acquisition of brings to GCI's digital segment, we are now applying an EV/EBITDA of 9.5 (up from 8.0) to average EBITDA of FY '15 and FY '16. 

We also upped the EV/EBITDA multiple applied to the broadcast segment to 9.5 (from 8.0) as not only is broadcast's forward top-line growth comparable to digital, but its EBITDA margin is likely to be double that of digital.  In addition, the risk of the Aereo case is now non-existent.  And other companies in the space are trading at a much higher multiple.  Simply put - our sum-of-parts valuation assumption for the broadcast segment is conservative. 

We continue to apply 5.0 to the publishing segment's EBITDA.  Our sum-of-parts model (which includes net debt adjustments based on the upcoming acquisition) results in a total valuation of $44.30/sh for GCI.

Discounted cash flow 

Assuming a spin-off, we also applied separate 6-year DCFs to publishing, and digital & broadcasting.  We used 6-year DCF in order to have same amount of odd years as even years, given the significant impact that planned worldwide events (such as the Olympics) and U.S. mid-term and Presidential elections can have on broadcasting and publishing.

Given that most of the debt on the balance sheet is related to acquisitions made in the digital and broadcasting segments, we basically assumed a net debt of zero for publishing.  Based on continuing decline in newspaper publishing and circulation, we assumed a 4.5 terminal EBITDA multiple, which when applied with a 13.3% WACC, results in a $1.5bil equity value of the publishing segment, or $6.85/sh (based on the latest GCI sharecount). 

Assuming a net debt of $4.6bil (by the end of FY '14) for GCI's digital and broadcast segments, along with terminal EBITDA multiple of 9.5 and WACC of 8.9%, the digital and broadcast DCF model resulted in an equity valuation of $8.3bil, or $36.91 per share.  This makes our DCF-based valuation of the entire company, approx. $43.76/sh.

With all of this said, our latest valuation of the entire company is $44/sh, which is the average of DCF and sum-of-parts results.  Based on where GCI closed at on Friday, again this represents a 40% upside.

GCI related posts:

No comments:

Post a Comment