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Gannet Co., Inc. (New York Stock Exchange: GCI)
Gannett’s recent results were disappointing as the continuing secular headwinds facing the newspaper portion of the business weakened further. In addition, continuing inflation (newsprint, stationery, delivery, and salaries) added $50 million in incremental costs. in the first half of the year. To further accelerate the company’s transformation, management is undertaking a significant cost reduction program (15-20% of total costs), removing a significant amount of fixed costs from the company’s business model.
The cost reduction program is expected to be fully implemented in the fourth quarter and the initiatives are designed to generate more than $200 million in annual cost savings. Importantly, Gannett’s ongoing growth initiatives remain on track; the digital subscription business and digital marketplace solutions that carry attractive margins should eventually help the company grow back over time. In the meantime, as the cost reduction plan improves profitability, management plans to continue to aggressively reduce its overall debt levels.
Over the past 3 years, Gannett has paid down nearly $600 million in debt and has already reduced debt by $130 million to date. With ongoing non-core asset sales, Gannett is expected to keep debt reduction ongoing, which should unlock significant equity value over time. With the current market capitalization below normalized EBITDA and the company’s free cash flow, market fears of new secular challenges and the possible impact of a recession seem significantly priced into the share price.
We remain patient with Gannett’s management’s multi-year transformation plan and believe that the significant cost-cutting program, further debt reduction and broad asset base provide a sufficient margin of safety in the short term. With the stock price near record lows, we see a significant difference between price and value and believe that the long-term upside potential remains at multiples of the current price level.
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