Gannett: Where Buffett Meets Zillow
Smead Capital Management
By Bill Smead
May 30, 2012
Dear Fellow Investors:
You
will be surprised to hear that I am somewhat addicted to keeping track
of the value of the home we have in the Seattle area and the one in
Scottsdale,
Arizona. It seems that Zillow uses comparisons to recent sales as the
primary vehicle to come up with their “Zestimates”. We believe at Smead
Capital Management (SCM) that comps are a useful tool in valuing common
stocks. They are even more useful if the transactions
are recent and spectacularly useful if the comps come from a savvy
buyer. We would like to run our version of a Zillow estimate on Gannett
(GCI).
What
triggered these analyses were the recent sale of 9 TV stations by
McGraw-Hill to E.W. Scripps and the acquisition of 63 daily newspapers
by
Warren Buffett’s Berkshire Hathaway (BRK) from Media General (MEG).
Gannett owns 84 daily newspapers including USA Today and the Arizona
Republic. They own 23 TV stations which are mostly affiliated with NBC,
ABC and CBS. Lastly, they have a major online/digital
business led by CareerBuilder. To get comps on CareerBuilder we used
public market prices and PE ratios on companies which compete with
Gannett. Infospace (INSP), Monster (MWW), Move.com (MOVE) and IAC
Interactive (IACI) provide us a blended valuation to
complete the three parts of the company. Below is our analysis:
To
say that Warren Buffett is a shrewd buyer is an understatement. E.W.
Scripps is a veteran owner of TV stations and is certainly aware of how
out
of favor the industry is in the age of the internet competing for
people’s time and eyeballs. Therefore, we don’t consider this a
maximization of value for Gannett in the same way that selling our house
today would put us anywhere near the peak value which
could be attained over the next ten years. It is a compelling view into
how undervalued Gannett is as it trades near $13 per share recently.
Why
is Buffett buying newspapers today when he has explained how damaging
the internet has been to the stranglehold newspapers had on the delivery
of important and entertaining information? We think the answer is
three-fold; content differential, profitability and price. Buffett
believes that the information in communities which is not handled
effectively by anyone else is being established once again.
At the Berkshire Hathaway annual meeting he talked about the fact that
ESPN (part of Disney (DIS)) is where you go to get national sports news
and stock quotes are available like water on the internet. However, he
added that local sports, local politics, community
affairs and obituaries are still important and valued. A successful
newspaper must have content which is different and timelier than can be
gathered anyplace else. Here’s what the Oracle of Omaha said in a letter
dated May 23, 2012 to the publishers of Berkshire
Hathaway’s daily newspapers:
“Though
the economics of the business have drastically changed since our
purchase of The Buffalo News, I believe newspapers that intensively
cover
their communities will have a good future. It’s your job to make your
paper indispensable to anyone who cares about what is going on in your
city or town.
That
will mean both maintaining your news hole — a newspaper that reduces
its coverage of the news important to its community is certain to reduce
its readership as well — and thoroughly covering all aspects of area
life, particularly local sports. No one has ever stopped reading when
half-way through a story that was about them or their neighbors.”
Second,
Buffett argues that by ceasing to give away content and moving away
from newsprint to digital delivery will give substantially better profit
margins to surviving newspapers. Gannett told us in a conference call
recently that they are putting up pay walls on all their online
newspapers sites. Buffett says it this way:
“We
must rethink the industry’s initial response to the Internet. The
original instinct of newspapers then was to offer free in digital form
what
they were charging for in print. This is an unsustainable model and
certain of our papers are already making progress in moving to something
that makes more sense. We want your best thinking as we work out the
blend of digital and print that will attract both
the audience and the revenue we need.”
Lastly,
Buffett and E.W. Scripps are getting very favorable prices because
there is a lack of optimism about businesses which compete with the
internet,
be it news content or TV entertainment. By being greedy when others are
fearful, they are getting the price from a “buyers” market. Mr. Buffett
describes Mr. Market this way:
“Times
are certainly far tougher today than they used to be for newspapers.
Circulation nationally will continue to slip and in some cases plunge.
But American papers have only failed when one or more of the following
factors was present: (1) The town or city had two or more competing
dailies; (2) the paper lost its position as the primary source of
information important to its readers or (3) the town
or city did not have a pervasive self-identity. We don’t face those
problems.”
We
at SCM believe that the improvement in the economy the next three to
five years bodes very well for the deliverers of content. The sale of
houses
and cars are a big advertising market for newspapers and local TV
stations. Housing has been in the worst depression since the 1930’s and
auto sales have been muted by the anemic recovery we have had so far. In
summary, we like our chances with Gannett, when
the comps show it worth $24.44 per share in our analysis. Remember,
Buffett and E.W. Scripps bought at prices chosen to make good returns on
their recent purchases.
The
information contained in this missive represents SCM's opinions, and
should not be construed as personalized
or individualized investment advice. Past performance is no guarantee
of future results. All of the securities identified and described in
this missive are a sample of issuers being currently recommended for suitable clients as of the date stated in this missive and do not represent all of the securities
purchased or recommended for our clients. It should not be assumed that
investing in these securities was or will be profitable. A list of all
recommendations made by Smead Capital Management
within the past twelve month period is available upon request.
(c) Smead Capital Management
