Only three companies reported earnings - MDP, OCSL, and TOSYY. The stocks retain their Buy ratings and price targets.
Meredith Corporation (MDP) - Meredith has struggled with a sharp decline in advertising since the pandemic started. At some point, most of this should come back. Consumer engagement remains strong with both its local TV and printed content. The company has completed its planned asset sales. It has worked through most of its magazine closures/consolidations - while this has weighed on revenues it has actually improved profits. Meredith continues to develop new media properties and expand into digital-based revenues. The retransmission contract renewals appear to be going well, as the related revenues increased 10% in the quarter. Overall, the company retains its relevancy but is in a cyclical downturn. The upcoming election period should provide a short-term boost to advertising revenues. We continue to believe the shares offer meaningful value.
Revenues of $611 million fell 22% from a year ago and were in-line with consensus estimates. Of the $174 million revenue decline, about $110 million was due to cancelled/postponed ads and about $40 million was due to magazines that the company discontinued or rolled into similar publications.
Adjusted EBITDA of $80 million was down 53% from a year ago but about 20% above consensus estimates.
Despite lower profits, free cash flow grew 52% due to improved working capital, lower capital spending and lower restructuring costs. Meredith’s liquidity appears sturdy and the company should generate positive free cash flow in the upcoming quarter. Its $3 billion in debt is too high - while readily serviceable the debt needs to be better-supported by higher profits. Management is clearly focused on reducing debt first, then when it is back to pre-Time Inc acquisition levels, resume the dividend. Meredith repurchased all its expensive preferred shares outstanding in the quarter.
We retain our Buy rating with a $52 price target on Meredith Publishing (MDP)
Oaktree Specialty Lending (OCSL) - The management’s efforts to improve the quality of the company’s investment portfolio since taking control in late 2017 have allowed the company to endure and rebound from the Covid downturn. Weak results in the first quarter, which ended on March 31 (just after the market bottomed) and reflected disarray in the credit markets, were largely reversed in the second quarter. Oaktree remains a solid yet undervalued company. Management raised the quarterly dividend by 11%, to $0.105/share, an encouraging indicator of their confidence in the investment portfolio and its outlook.
Net investment income of $16.8 million was essentially unchanged from a year ago, but was higher than the first quarter largely due to the deferral of management fees.
Net asset value increased to $6.09/share, up from $5.34 a quarter ago but down 8% from a year ago. The sequentially higher NAV resulted from much-improved credit market conditions which boosted the value of its fixed income holdings.
Oaktree appears to be capturing some opportunities in the market downturn, as it made $261 million in new investments in the quarter, and $273 million in the prior quarter, compared to $67 million in the year-ago quarter.
OCSL shares trade at 83% of NAV, whereas we believe it should trade closer to 100% or higher. The shares currently pay an 8.8% dividend yield.
We retain our Buy rating with a $7 price target on Oaktree Specialty Lending (OCSL)
Toshiba Corporation (TOSYY) - This Japan-based conglomerate is recovering from the near-death experience caused by heavy losses in its Westinghouse nuclear power plant construction operations. That business is no longer part of Toshiba. Toshiba sold a 60% stake in its highly valuable memory chip business in 2018 and plans to divest its remaining stake but has not clarified when or by what means. Its remaining operations are being refocused on margin improvement and cash flow production.
In the first quarter of fiscal year 2021, Toshiba reported an operating loss of about $(118) million, compared to a profit of about $72 million a year ago. The company estimated that Covid-related costs were about $456 million, although we would consider some of this to be more enduring until the economy recovers. Overall, the company is making good progress with its cost-cutting and efficiency improvement programs. Cash flow improved, liquidity remains strong and the company is paying down its debt.
We retain our Buy rating with a $28 price target on Toshiba Corp (TOSYY)