Gatehouse (GHS) Could Fall Much Further

Douglas A. McIntyre

Newspaper chain Gatehouse (GHS) has been down as much as 15% today on poor earnings and a downgrade from “buy” to “neutral” at Goldman Sachs (GS).

And, this may just be the beginning. Gatehouse trades at a premium to most other newspaper stocks, and the reasons for that are going away. The company reported revenue “as adjusted” of $172 million, and operating income of $12.5 million. The company had a net loss of $8.8 million. The “as adjusted” numbers are used because the company has made a number of acquisitions.

On a GAAP basis, the company had revenue of $163.4 million up from $97.6 million in the same quarter last year. Excluding depreciation and other items, expenses were $131.2 million, up from $78.1 million. Interest expense was $22.3 million, and that is the company’s big problem. If revenue continues to fall, the Gatehouse long-term debt of almost $1.2 billion looks like a very big number.

Gatehouse still trades at about one times revenue. Gannett (GCI) is at 1.2x, but smaller and financially weaker McClatchy (MNI) is .6x. Journal Register (JRC), which is also loaded with debt, trades at .2x.

What is the rational price for the Gatehouse stock? Based on industry comparables, probably less than $6. That is well below the $10.26 it trades for today.

Douglas A. McIntyre