Gannett Co., Inc. (NYSE:GCI) and New Media Investment Group Inc. (NYSE:NEWM) are the two most active stocks in the Publishing – Newspapers industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Gannett Co., Inc. (GCI) has an EBITDA margin of 6%, compared to an EBITDA margin of 7.59% for New Media Investment Group Inc. (NEWM). This suggests that NEWM underlying business is more profitable. GCI’s ROI is 5.20% while NEWM has a ROI of 5.70%. The interpretation is that NEWM’s business generates a higher return on investment than GCI’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. GCI’s free cash flow (“FCF”) per share for the trailing twelve months was +0.58. Comparatively, NEWM’s free cash flow per share was +0.19. On a percent-of-sales basis, GCI’s free cash flow was 2.16% while NEWM converted 0.81% of its revenues into cash flow. This means that, for a given level of sales, GCI is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. GCI has a current ratio of 1.10 compared to 1.90 for NEWM. This means that NEWM can more easily cover its most immediate liabilities over the next twelve months. GCI’s debt-to-equity ratio is 0.45 versus a D/E of 0.50 for NEWM. NEWM is therefore the more solvent of the two companies, and has lower financial risk.
GCI trades at a forward P/E of 9.48, a P/B of 1.11, and a P/S of 0.30, compared to a forward P/E of 30.96, a P/B of 1.05, and a P/S of 0.58 for NEWM. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. GCI is currently priced at a -28.09% to its one-year price target of $11.50. Comparatively, NEWM is -18.66% relative to its price target of $16.67. This suggests that GCI is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.70 for GCI and 2.70 for NEWM, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. NEWM’s beta is 1.24.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. GCI has a short ratio of 10.32 compared to a short interest of 10.63 for NEWM. This implies that the market is currently less bearish on the outlook for GCI.
Gannett Co., Inc. (NYSE:GCI) beats New Media Investment Group Inc. (NYSE:NEWM) on a total of 7 of the 12 factors compared between the two stocks. GCI has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, GCI is the cheaper of the two stocks on an earnings and sales basis, GCI is more undervalued relative to its price target. Finally, GCI has better sentiment signals based on short interest.