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Get One Up on the “Smart Money” with GateHouse Media
By Michael Brush
Exclusively for InvestorIdeas.com
November 28, 2007
By now, there are entire websites dedicated to tracking every move of the “smart money” – those geniuses at hedge funds and private equity shops who get paid top dollar to produce better returns. But it’s not always clear that following these wise guys is such a good move.
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Take the case of Fortress Investment Group (FIG), and a little play it has on in the newspaper publishing business, for example. At the end of August, Fortress sunk $7.6 million into a local newspaper conglomerate called GateHouse Media (GHS) at around $13-$13.50 a share, according to InsiderScore.com. The stock recently traded for $7.60, which means Fortress Investment Group is out $3.1 million on the investment in just three months.
Oops.
But I’m not here to pick on Fortress, and they are probably long-term investors, anyway. If so, it looks like they have several good reasons to own this community newspaper powerhouse where insiders -- including chief executive Michael Reed -- just snapped up $380,000 worth of stock for about $7.60 to $9.60 in the recent pullback.
That might be a signal that it’s time to buy some shares of GateHouse media at nearly half the price that the smart money recently paid. Here’s why.
Big dividend
First off, with its stock at these levels GateHouse pays a sweet 14% dividend. That’s going to look even sweeter as the Fed continues to cut interest rates.
Of course, any time a company pays a dividend that high you have to wonder whether there is some kind of trouble on the horizon that might jeopardize the payout. But that doesn’t seem to be the case with GateHouse.
These tiny community newspapers it owns may not be growing much. But they sure do throw off a lot of cash. Operating cash was $41 million in the third quarter, or 34% of revenue. That juicy 14% dividend backed by such prodigious cash flow is one reason why Morningstar (MORN) analyst James Walden has a five star rating on GateHouse stock, Morningstar’s highest rating.
And while the company has loaded up on debt to finance acquisitions, it has cash flow of about twice its interest expenses, which provides a margin of safety. “Still, we'd be more comfortable if it paid down some of its debt bill,” cautions Walden.
Big growth
GateHouse has been on a buying spree in the past year, purchasing community papers from operators like Gannett (GCI), Journal Register Company (JRC), and Copley Press.
Thanks to this aggressive acquisition strategy, revenue was up 60% in the third quarter to $119 million. Circulation doubled to 34.8 million. And operating cash rose 150% to $41million. Throw in acquisition-related synergies, and the buying spree means more cash to support the dividend.
As of the end of September, the company had 475 community publications including 86 daily newspapers, 264 weekly papers and 125 shoppers in about 20 states around the country.
Only game in town
While many national newspapers have seen revenue slip big time in part because of large circulation declines, sales at GateHouse were down only 1.7% last quarter. That’s not bad, relatively speaking. Part of this strength comes from the fact that GateHouse operates very small papers. Average paid circulation for its daily newspapers is less than 5,500, says Morningstar’s Walden. They are often the only game in town for local news and advertisers, or pretty close. Over 70% of the community papers have been published for more than a century.
Some potential negatives
Morningstar’s Walden thinks GateHouse has been overpaying for acquisitions. If that continues, it won’t be good for shareholders, he cautions. Next, of course, a sharp economic downturn would hurt advertising. But I don’t think we will have that serious of an economic downturn. Finally, Fortress Investment Group owns or controls about 42% of the company’s stock, and it has a big say in who is on the board. In these situations, there’s always the risk that the big shareholder will pull some trick that hurts the smaller ones.
The bottom line: That 14% dividend looks pretty tempting, especially since the recent round of insider buying suggests the stock price decline may be about over.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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