In an earlier article, I argued that News Corp. (NWSA) was an undervalued company with strong upside. Challenges to the print business have highlighted investor's lack of appreciation for the amount of diversification that the media firm offers, as evidenced by across-the-line solid first quarter earnings outside of publishing. Demand for cable programming and film entertainment turned out particularly strong, resulting in a solid start to 2012 earnings. Similarly, the negative speculation about Gannett's (GCI) underperformance in newspapers is spilling over into its other business and unreasonably depressing valuation.
From a multiples perspective, only Gannett stands out as an undervalued investment. It trades at just a respective 6.3x and 6.1x past and forward earnings while offering a dividend yield of 2.4%. New Corp, on the other hand, trades at a respective 15.7x and 10.5x past and forward earnings while offering a dividend yield of 1.1%. Management is completing a $5B share repurchase program, but it is giving a signal that this is the high point. In addition to having higher multiples, Gannett also has gross margins that are 350 basis points higher than that of its competitor at 40.5%. Management is trying to get tough on costs, but third quarter EBITDA margins were below expectations.
On the third quarter earnings call, Gannett's President Gracia Martore noted:
"Our earnings per share were $0.44 when adjusted for special items. They reflect the positive impact of several strategic initiatives, particularly our digital efforts, but also the challenges of managing our businesses in the midst of a tremendous amount of economic uncertainty and the softening global economy.
We also had to compare against our own terrific success in garnering political spending last year. Total revenue as a result of all these factors was down about 3.5%.
An increase in digital segment revenues was another bright spot, reflecting double-digit revenue growth at CareerBuilder. They continued to capture market share domestically, leading to solid revenue growth, and CareerBuilder's international operations achieved substantially higher revenue growth."
Third quarter results were in line with revenue expectations, but below EBITDA expectations. Circulation, broadcasting, publishing ad sales and total revenue were all down while TV revenues were a bright spot. Going forward, management indicated a challenging market and that it will likely use free cash flow to pay off net debt.
Consensus estimates for Gannett's EPS indicate a rocky ride: it will decline by 12.7% to $2.13 in 2011, grow by 2.3% in 2012, and then decline by 7.3% in 2013. Assuming a multiple of 8x and a conservative 2012 EPS of $2.13, the rough intrinsic value of the stock is $17.04, implying 27.7% upside. Even if the multiple were to stay at 6.3x and 2012 EPS turns out to be 4.6% below the consensus, the downside is negligible.
News Corp., on the other hand, had quite the opposite story that Gannett had. The media titan experienced double-digit growth in all segments, but publishing. Consensus estimates for its EPS are that it will grow by 16.9% to $1.38 in 2012 and then by 21.7% and 22% more in the following two years. Assuming a multiple of 14x and a conservative 2013 EPS of $1.57, the rough intrinsic value of the stock is $21.98. I find that it has less risk than Gannett given diversification, strong brand name, and solid fundamentals. Analysts currently rate both companies a "buy," but tend to prefer News Corp.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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