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Investors’ Playbook for Gannett (GCI): Navigating Potential Legal Challenges and Stock Impact

Gannett Co., Inc. (GCI) was recently hit with a lawsuit alleging that its efforts to diversify its newsrooms led to discrimination against white employees. GCI is the largest media company by print audience and one of the largest by digital audience. The company has over 218 daily publications with several hundred weeklies.

Five current and former employees claimed they were either fired or ignored for promotions in favor of lesser-qualified women and people of color. The plaintiffs said these decisions were driven by the company’s Reverse Race Discrimination Policy in 2020 to make its workforce as diverse as the country by 2025.

The plaintiffs alleged that the policy discriminated against non-minorities based on their race. The lawsuit read, “Gannett executed their reverse race discrimination policy with a callous indifference towards civil rights laws or the welfare of the workers, and prospective works, whose lives would be upended by it.” According to the lawsuit, GCI had tied executive bonuses and promotions to achieve the goals indicated in the policy.

The suit cites the Supreme Court’s decision to eliminate race-based college admissions. The court rejected practices that allowed race to be sometimes a deciding factor in a person’s admission to a college. Chief Justice John Roberts remarked, “eliminating racial discrimination means eliminating all of it.”

In a statement, GCI’s chief legal counsel, Polly Grunfeld Sack, said, “Gannett always seeks to recruit and retain the most qualified individuals for all roles within the company. We will vigorously defend our practice of ensuring equal opportunities for all our valued employees against this meritless lawsuit.”

The plaintiffs and class are seeking an order to eliminate GCI’s Reverse Race Discrimination Policy and lost wages, back pay, including lost fringe benefits. GCI is not the first company to be sued for its diversity programs. However, unlike other cases brought by conservative groups, GCI is being sued by its former and current employees.

GCI’s stock doesn’t appear to have reacted to the news, as it has gained 6.6% over the past month.

Here’s what could influence GCI’s performance in the upcoming months:

Mixed Financials

GCI’s total operating revenues for the second quarter ended June 30, 2023, declined 10.2% year-over-year to $672.36 million. Its same-store total revenues decreased 8.6% over the prior-year quarter to $673.26 million. The company’s adjusted net loss attributable to GCI narrowed 85.3% year-over-year to $5.98 million.

On the other hand, its adjusted EBITDA rose 39.9% over the prior-year quarter to $71.15 million. Its non-GAAP free cash flow came in at $38.42 million, compared to a negative non-GAAP free cash flow of $43.27 million.

Mixed Analyst Estimates

Analysts expect GCI’s EPS for fiscal 2023 to increase 131.6% year-over-year to $0.18. On the other hand, its EPS for fiscal 2024 is expected to decline 44.4% year-over-year to $0.10. Its fiscal 2023 and 2024 revenue is expected to decrease 7.7% and 2.3% year-over-year to $2.72 billion and $2.65 billion.
Discounted Valuation

In terms of forward EV/Sales, GCI’s 0.62x is 65.9% lower than the 1.81x industry average. Its 5.63x forward EV/EBITDA is 33.4% lower than the 8.45x industry average. Likewise, its 14.02x forward EV/EBIT is 9.9% lower than the 15.57x industry average.

Mixed Profitability

In terms of the trailing-12-month Return on Total Capital, GCI’s 4.15% is 18.8% higher than the 3.49% industry average. Likewise, its 1.12x trailing-12-month asset turnover ratio is 132.1% higher than the industry average of 0.48x.

On the other hand, GCI’s 9.95% trailing-12-month EBITDA margin is 45.9% lower than the 18.38% industry average. Likewise, its 4.37% trailing-12-month EBIT margin is 48.7% lower than the 8.50% industry average. Furthermore, the stock’s 4.12% trailing-12-month levered FCF margin is 48.6% lower than the industry average of 8.01%.

Bottom Line

Although GCI has been sued by workers over its Reverse Race Discrimination Policy, the company’s workforce comprises more than 70% white. Moreover, more than 80% of leadership positions are held by white individuals. However, if the lawsuit against GCI is successful, the company may have to overturn its reverse race discrimination policy and compensate the plaintiffs and the class.

Amid this potential uncertainty arising from this legal challenge and its mined financials, it could be wise to wait for a better entry point in the stock.

This post was originally published on INO.com