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Recommendations: 27
GCI is a stock that came up on Greenblatt's screen awhile back (and is still there, depending on the parameters used). I thought it might make a good case study for me to try and get a handle on the BMW method (I noticed from some previous BMW posts that it is not exactly a favored stock on this board. I find myself to be far more optimistic, but am interested in having my analysis shot at).
GCI (Gannett) is trading below approx -3 RMS, with 1-yr return of 105.1%, if the stock returned to its mean CAGR:
http://invest.kleinnet.com/bmw1/stats16/GCI.html
Piotroski: 6. Areas that failed to score were Net income to total assets growth, current ratio improvement, and gross margin growth. F_Score improved from 5 due to an improvement in asset to long-term debt ratio.
GCI has a long history of a steadily improving annual low. Its current price of 53.85 is slightly higher than its 52-week low of 53.76, and represents a low since 2000.
Graham's criteria:
Current ratio is 1.29, well short of Graham's minimum of 2.0.
Long-term debt exceeds working capital.
The company has made money each of the past 10 years.
Gannett has paid dividends every year since 1929, and has increased dividend payments 35 times during that period.
EPS has increased from 3.35 to 4.99 over the past 10 years: this is a 48% increase, well above Graham's 33% threshold.
The P/E is 10.9, well below G's 15, as well as the 27.1 industry average and 21.4 S&P 500 average.
Price to book is 1.7, just higher than Graham's max of 1.5. However, price to book times p/e is 18.5, which is well below Graham's max of 22.5. Overall, given the inflation of price to book ratio's since Graham's day, these numbers indicate a very reasonable price for the stock.
Due diligence:
As is mentioned on the boards whenever GCI is discussed, management identifies competition from alternative media over advertising dollars as a primary source of uncertainty in the future. Their stated strategy is designed to address this challenge:
• delivering customer satisfaction and expanding our customer base by raising the standards for and enhancing the quality of our products;
• making acquisitions and investments in news, information and communications and related fields that make strategic and economic sense that leverage our existing assets; and
• capitalizing on opportunities presented by changing technologies to expand our information and advertising businesses.
GCI relies on broadcasting revenues in addition to print media. However, despite the fact that this would presumably be a segment in which competition for advertising would be less critical than print, their success in broadcasting seems to lag that of print. Print revenues and circulation are both increasing strongly, at what would appear to be a steady compounded rate, whereas broadcasting revenues are inconsistent (though still profitable). Decreases in broadcasting earnings are the reason we see the red flags in the F_Score. Note: publishing is by far the largest business segment for GCI, and accounts for the vast bulk of its income, cash flow, asset base and capital expenditures.
Short-term paper coming due and being refinanced at higher interest rates will result in a worsening debt situation. Unless broadcasting revenue improves (which it will, based on expected revenues related to the Winter Olympics, but I don't know by how much), debt to long-term assets will likely continue to be an issue. (By the way, so far the expectation that Winter Olympic ad revenue would be strong has held out—see conference call transcript at http://media.seekingalpha.com/article/9009)
As mentioned earlier, dividends have been steadily increased by GCI for a long time. In fact, the dividend has been substantially increased every year since '96. However, the total cost of dividends to the company was $273M in 05 versus $274M in 04 despite a dividend increase from $1.04 to $1.12. This was due to a decrease in shares outstanding. Furthermore, the ESOP uses cash to purchase shares of stock on the open market rather than covering obligations through the issuance of new shares. The company's finances seem to be managed very conservatively, despite some slight concerns we might have over debt and current ratio (e.g., the company is not involved at all in the derivative markets or foreign currency markets (other than what is required for primary operations in U.K.)). I think this all paints a picture of a management very much interested in promoting shareholder wealth! There is evidently a strong culture of concern for the shareholder at GCI which is not all that common today. Stock repurchase at GCI is based on whether GCI stock is seen to be a better investment than other opportunities versus using it as a tool to manipulate stock prices near the tops of their runs.
The economy in the U.K. also seems to be a major source of softness in overall results. However, there is a fairly strong confidence that this will ease by the end of this year (the U.K. historically sees about an 18 month cycle, which is nearing its end. Also, there are indication from the housing market that the U.K. economy is recovering. Of course, these are uncertain times for us all, and the U.K. is in the thick of it).
Insider trading is mixed, but there's plenty of open-market buying over the past couple of years at prices up to around $80.
Analyst opinion is generally positive, mostly weighted at “hold,” with several analysts recommending “buy” or “strong buy.” One analyst recommends “sell.” Since June there have been no positive changes in analyst recommendations.
Looking at a recent conference call, I think this is a pretty good summary of the current situation with the company:
Dan Jenkins, State of Wisconsin Investment Board
Good morning. Kind of following up on Rob Shipman's question, I know your credit metrics have weakened quite a bit from a year ago like your operating cash flow coverage is down to about 7.5 times from 11.4 a year ago and your balance sheet leverage is obviously as well. I guess my question is how much further would you see yourselves pushing those metrics given the fact that your share prices are at a four-year low and as acquisition opportunities present themselves, would you spend an excess of free cash flow given those in a way you're set right now?
Gracia Martore, Senior Vice President and CFO
Well, I think as we've done historically, when we have seen investment opportunities that we believe will add significant value to the company and to our shareholders and also our bond holders, then we will leverage up the balance sheet as we did, as I mentioned, in 2000-2001, as we did frankly back in 1995 when we did the multimedia acquisition, but then we are very focused on paying down the debts because, again, as we have consistently said, we very much want to be a strong investment grade company, and so we will continue to be focused on balancing all of those factors — acquisition, share repurchases, and the like, to continue to maintain our profile as a strong investment-grade company. But from time to time, we will lever up a bit and then if you look at our 15-20 year chart, historically we've been focused on bringing the debt down and then we'll re-lever again if the right opportunity and right investments come along.
Dan Jenkins, State of Wisconsin Investment Board
I guess my followup would be, what would be the higher priority for use of your cash given the way your share prices, would it be share buybacks or would it be US paper acquisitions or UK paper acquisitions or perhaps broadcasting, is there any area that you see as maybe a higher priority for your cash currently than another?
Gracia Martore, Senior Vice President and CFO
The highest priority would be to bring the best results to the company, and we're fairly agnostic as to whether that's in the UK or the US or it's in newspapers or broadcast or on the digital front. Whatever will create the most value for our shareholders is where we are interested in investing, as it has been for the last early something years that Doug has been at the company and continues to be. So, we'll just keep that same discipline and that same focus going forward.
Douglas H. McCorkindale, Chairman
Dan, we'll just go where we can make the most money for the shareholders. There's a whole series of opportunities out there and we don't say we have to be bigger in broadcasting or bigger in print, we'll go where we can make money. We can broadcasting stations that are not well run or at least as well run as Gannett can do it and make a lot of money, we can buy the Clipper of this world, which we do very, very well, we can do things in the digital world or we can do all of them at the same time to bring the most money to the bottomline and to improve the cash flow, so there's no game plan that you only have to do one.
In other words, GCI is leveraging their strength to buy future capacity in a very disciplined way, taking advantage of market weaknesses. I think the future will include either aggressive stock repurchase or responsible investment in new revenue inlets. Meanwhile, the company will work hard to improve its debt structure.
Is this a perfect investment? Nope. We've identified several areas of concern. However, I don't see a reason to be pessimistic to the point of doom and gloom. GCI continues to be strongly profitable and even to steadily improve revenues despite an increasingly competitive environment.
TDT
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Recommendations: 0
Incidentally, there are two large companies that are currently Magic Formula Investing picks that are also covered by Mike's data, which look like possible BMW buys: GCI and SVM. SVM isn't as low versus the CAGR as is GCI.
TDT
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Recommendations: 8
Howdy TDT,
First the caveats ... I haven't really looked at GCI, nor its competitors nor its general business group, so anything I offer is likely to worth exactly what you are paying for it <smile>.
Why did you choose the 16 yr vs the 20 yr chart? But more germane to me is that I prefer to be able to ID 2 more or less complete business cycles on a chart before trusting it for my own investments ... and since very generally speaking a business cycle is about 13 years ... well, I don't use even a 20 year chart for a BMWm type purchase consideration.
Why do you believe that a 16 year chart establishes a reasonable historical average that is likely to be reverted to? What first catches my lupine orbitals is that the stock is where it was ten years ago (thats quite a hunk of the 16 years) and been generally flat to down for the last nine years. Why do you feel that its now about to change vs last year or three years ago? If you believe in trends, no mater how one defines em, GCI seems to be firmly ensconced in a downtrend ... do you like catching falling daggers? How many fingers you got left <wolven grin>?
I also note (from Yahoo) more debt than I like to see, but the Op CF looks rather good. The negative quarterly (yoy) earnings growth makes me itch <g>. Although the dark side shorters are only at about 2%, they seem to be increasing their stake as the price drops and drops these last 18 months or so ... why are they doing that? Do they know something that isn't apparant ... I'd dig around to try to figure out what the basis for the short's interest is. I LOVE the annual increases to divvies so thats a great plus, but I still wind up not being able to ignore that falling price trend ... maybe I'm just a big ole quivering mass of scared wolf <g>?
Just from my dennish pov, I like to see some sort of exploitable competitive advantage ... how do these folks differ form their peers? Or is the bet they are the same thus likely to rise to meet the performance of their industry group? Your bulleted descriptions (or cut and pastes) on their stated strategy reads rather generically and something I would think all of their competitors will agree they also seek to do ... what distinguishes em from the herd?
They seem to be in the newspaper industry group (at least according to equitytrader.com), which as a group is trending strongly downward ... and this sort of matches my general impression of mainstream print media ... declining revenues and profits ... and this mangy old fur bearer doesn't bet against an industrial trend even when he LOVES the company. I did note your mentioning they do get sales / revs from Broadcasting ... but ain't broadcasting revenues, even though rising, facing pressures from new media (net-centric) alternatives in addition to more personalized forms of advertising (buzz, seeding, etc.), not to mention some academic reports suggesting broadcast (TV and radio) don't have the financial returns to support their costs.
Then again, I specifically seek to minimize BMWm signals, the hope / expectation being to have safer and more quickly profitable returns ... and maybe that's not the preferred approach for most who lap from the BMWm fountain <lupine shrug>?
But maybe more important than anything I just thunk ... is that a company can be a great and wonderfully profitable investment and NOT fit my (or anyone's?) BMWm criteria. The BMWm appears to me a wonderfully powerful approach to profitable investing, but not the only way to cull the fat and tasty sheep from the herd (so to speak <g>).
Take care and good luck in whatever you decide to do re: GCI,
IcyWolf
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Recommendations: 0
TDT
Great analysis, thanks for sharing the work. I like the analysis of the low trending up over time.
Your write-up raised a couple of questions to me, and obviously many more to IcyWolf.
As to a potential catalyst to quickly raise the price, rather than relying on a slow and upward trend of the 52 week low, are these possible candidates for a catalyst? In the newspaper business I have noticed some consolidation lately - will GCI benefit from this? Even though dollars may go down to the print media in general, is GCI in a better position to capture more of these dollars going forward? As to new opportunities, what can they do, what will they do, and who will they likely do it with? Any rumours or speculation regarding possible acquisitions or partnerships that could act as a catalyst.
Again, I enjoyed the analysis and appreciate the work that you put into it. Hope these suggestions help in the investment analysis.
T. Allan
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Recommendations: 3
<scene of a wolf trying to smack himself upside the head>
Sometimes us old mangy curmudgeons forget our manners ... sorry TDT ... T. Allan is very right ... TDT, I found your analysis was a good one, even if I seemed to pick at fleas and nits etc.
But I liked T.Allan's questions too ... although we mostly chat about charts hereabouts, the true-believers (aka CON attenders and attendettes <g>) all have their own personalized versions of Due Diligence (DD). And since we each have DD that would probably make the others blanch cough and snort ... we don't tend to rub it in that we each believe our own is vastly superior to any others .... or should that be we each tend to think ours don't smell as badly as the others? ... I'm referring to DD of course <lupine wink>.
Take care,
IcyWolf
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Recommendations: 8
Wait 'til the next presidential election. If a democrat wins, buy the stock. If a Republican wins, as Cramer's button says - "Don't buy, Don't buy!" Don't believe me? Look at the chart:
http://quote.fool.com/chart.aspx?s=GCI&q=l&l=on&t=my
Tanked right after Bush 1 got in, rose continuously for the duration of Clinton, tanked right after Bush 2 got in, and tanked again after Bush 2 was re-elected...and we're supposed to believe the mainstream media is not liberal...apparently a lot of investors, left and right alike, think otherwise...
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Recommendations: 2
Recommendations: 2
Apparently, Warren Buffett was fairly negative at the Berkshire annual general meeting on newspapers because of his inability to predict with any certainty what the future holds for this industry.
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Recommendations: 4
Draw your own conclusions.
I always kind of suspected that Haliburton was a stealth left wing commie pinko company.Leave it to the markets to prove it.
Dick Chenney and Mao, who knew?
B
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Recommendations: 2
Great input, bimmers.
I think the good story with GCI is that its management has a very long history of success, but perhaps even more importantly, a very long history of taking care of shareholders. Recently, they've managed to increase dividends without increasing total dividend cost by offsetting dividend payments with stock repurchasing. Their cash flow continues to be very strong, so there's good reason to believe that this approach will continue. If it does, it really won't matter whether the industry declines as long as individual shareholders continue to own a growing amount of equity with a growing dividend. For this to happen, costs will have to be managed very carefully, and the company will have to continue expanding its share through acquisition. This matches the company's stated objectives, their past successes, and is echoed throughout their recent conference calls. Based on this story, the stock has certainly been irrationally schwacked of late.
On the other hand...
The debt issue has me feeling uncomfortable (as it does management). The cost of refinancing debt against rising interest rates could severely curtail the company's ability to execute the above strategy. With increasing revenue going against interest, there will be less cash available for acquisition, dividend payments, and stock repurchasing. In fact, the company could even decide to issue stock (although I think this is unlikely in the near term, based on their culture and the fact that they so recently bought stock at market prices higher than the current).
The fact that there is no foreseeable catalyst for a positive correction is important, as is the undeniable fact that neither Graham nor Buffett would buy the stock given the company's debt and current ratio, and would be a little concerned with the price to book. Finally, it does not meet the requirement of a BMW min return factor of 2.00. These, along with the uncertainty in the future of print media, reduces this stock to a market timing play. I "feel" that the company will see a significant correction over the next year; however, I can't really justify buying it. However, it might be worth keeping a close eye on. Should they manage to get their debt a little more under control, it might be worth another look.
Thanks for all the feedback!
TDT
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Recommendations: 4
TDT:
Welcome aboard.
This board needs better DD like you put forward, thanks.
I do not know a lot about GCI. However a couple of items caught my attention.
TDT..."GCI has a long history of a steadily improving annual low. Its current price of 53.85 is slightly higher than its 52-week low of 53.76, and represents a low since 2000."
I normally like BMW stocks that fall off the table. A quick decline normally leads to a quick recovery. GCI looks like two years of a death spiral. I like a decline more like the one GCI showed in 1990 time frame.
TDT..."Analyst opinion is generally positive, mostly weighted at “hold,” with several analysts recommending “buy” or “strong buy.” One analyst recommends “sell.” Since June there have been no positive changes in analyst recommendations."
I like BMW stocks that the entire analyst group has thrown under the bus. The night is darker before light. Again, when no one wants the stock is the time I want to buy to help my upside. Now, this takes some nads and your DD will give you brass nads if done right.
TDT..."Dan Jenkins, State of Wisconsin Investment Board
Good morning. Kind of following up on Rob Shipman's question, I know your credit metrics have weakened quite a bit from a year ago like your operating cash flow coverage is down to about 7.5 times from 11.4 a year ago and your balance sheet leverage is obviously as well."
Red flag, red flag, red flag. There leverage is down 35% yoy. Red flag, red flag, red flag. When I see operating cash flow down, this would make me dig into the cash flow statement to see what is causing this. Cash flow does not lie. There is some black magic in some of the other numbers but cash flow is hard to spin. Also, the current ratio failing the Piotroski test supports that there may be some challenges.
Again, I have not looked at GCI close enough to have an opinion on whether I would buy or not. So, make your own decision with the information and best either way. Please let us know what your final decision is and how it works. Feedback helps us all.
Cheers, Gary
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Recommendations: 0
A correction (more or less) to my earlier comment, "neither Graham nor Buffett would buy the stock":
http://equityinvestmentideas.blogspot.com/2006/05/list-of-companies-in-warren-buffets.html
I actually knew this at one time, but forgot. That fact that Buffett owns GCI renews my interest quite a bit. Also, the stock has been a favorite of late among some pretty interesting folks:
http://www.gurufocus.com/most_active.php
...I'm not there yet, but I'm not tossing GCI aside either.
Note: I should emphasize that GCI is a MFI stock, which carries some weight with me. Even though MFI is only valid in aggregate, companies that survive the screen should generally either be very good or very bad. Despite the uncertainty over the future of print media, I don't think newspapers are quite obsolete yet; nor do I see GCI as a really bad company on its way to the deconstruction yard.
TDT
"If I only had a brain."
I never noticed this before...pretty neat finance beta from Google:
http://www.google.com/finance?q=gci&hl=en
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