With the improvement in the economic environment, murmurs about advertisers returning to the market are gaining strength. Gannett Co. Inc. (GCI) is expected to benefit from positive trends that are emerging in both print and digital advertising with the advertisers’ spending gaining pace.
This prompts us to upgrade our recommendation on Gannett, the diversified media conglomerate, to Outperform from Neutral with a target price of $16.00.
Gannett now expects television advertising revenue to climb by more than 20% and digital revenues to rise in the mid-single digit percentage range in second quarter 2010. Although publishing revenue is expected to fall in the low-to-mid single digit percentage range, but it reflects a sharp improvement from a decline of 7.9% and 17.9% witnessed in first-quarter 2010 and fourth quarter 2009, respectively.
The rate of fall in publishing advertising revenue has been decelerating since fiscal 2009, and continues to shrink in fiscal 2010 as advertising demand firms.
The significant potential risk is the company’s high dependence on advertising revenue, which is driven by the health of the economy. To mitigate this, Gannett like The New York Times Company (NYT) is transmuting its business model by adding diverse revenue streams to hedge against economic cycles.
Gannett is adapting to the changing face of the multiplatform media universe, which currently includes Internet, mobile, social media networks and outdoor video advertising in its fold.
Consequently, we believe that these factors may result in the company delivering better-than-expected second-quarter 2010 earnings. Gannett is scheduled to report its second-quarter earnings on July 16, 2010.
The current Zacks Consensus Estimate for the quarter is 52 cents a share. The estimates in the current Zacks Consensus range from a low of 42 cents to a high of 59 cents a share.
Considering earnings surprises, the stock has been steady over the last four quarters, with positive surprises ranging between a low of 14.3% and a high of 24.3% with four quarters averaging 19.1%. This implies that Gannett has surpassed the Zacks Consensus Estimate by 19.1% over the said period, and is reflected in the Zacks #1 Rank on the stock, which translates into a short-term ‘Strong Buy’ rating.
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