for example, the earnings stream of newspaper publisher Gannett Co., in which Buffett bought a minority stake in 1994. Buffett paid approximately $24 (split adjusted), or 16 times earnings, for 4.9 percent of Gannett's shares. At the time, 30-year bonds yielded 7.8 percent. Buffett's returns, compared to a 30-year government bond, have been exceptional (see Figure 5-3). Buffett, in fact, was willing to pay a premium for Gannett, based on the fact that Gannett's earnings yield would quickly surpass the yield on bonds. Going forward, analysts were projecting that Gannett's earnings would grow at nearly 13 percent annual rates. Thus, Gannett offered Buffett a compelling earnings stream, especially after bond yields fell to around 6 percent in late 1997.
Not surprisingly, Gannett's stock rose by more than 150 percent in the three years subsequent to Buffett's purchase. By early 1998, newspaper properties such as Gannett had been bid up to between 20 and 25 times
One way to think about valuations is inverse of 10 Yr bond rate + certain premium; 12.5x plus 4 x i.e. 16.5 x
