This media company just raised its dividend by 2%, giving it an 8% annual yield, paid monthly.
Meredith Corporation (MDP)
From The Turnaround Letter
Meredith Corporation (MDP) is the nation’s largest publisher of print and digital magazines, with powerhouse titles such as People, Travel + Leisure and Martha Stewart Living. Complementing these publications, the company owns a portfolio of 17 local television stations. Founded in 1902 by Edwin Meredith with his Successful Farming magazine, the company now has 42 million paid subscribers of its print and digital publications and 30 million viewers of its local television stations. In January 2018, Meredith acquired magazine publisher Time, Inc, for $2.8 billion in an all-cash deal.
While the S&P500 rose over 50% in the five years through mid-2019, Meredith shares remained unchanged. Since then, the market has increased another 10% while Meredith’s shares have dropped 37%, driven by its surprisingly weak guidance that Fiscal 2020 EBITDA will be about 20% below consensus expectations. Much of the problem is that the Time acquisition hasn’t delivered the anticipated advertising revenues as quickly as the company originally expected. Also, $50 million in new strategic investments, as well as other costs, will weigh on near-term profits.
The weak guidance further stoked investor worries that Meredith may be on the losing side of the battle for profitable media relevance, particularly as its print advertising revenues continue to decline. Meredith’s somewhat elevated post-Time debt level, upcoming negotiations with television networks and cable service providers, and changes in their magazine portfolio like the closing of iconic Family Circle, only add to investor concerns. The market appears to be turning the page on Meredith.
Despite these investor concerns, Meredith appears well-managed and well-positioned to remain a solidly profitable provider of relevant content to an attractive target market. The company reaches over 180 million Americans (more than Comcast or Disney) including 85 million millennial women, and is a top-10 digital destination with 150 million monthly unique viewers. It stays focused on the highly valuable American women audience, avoiding straying into other categories in the pursuit of growth. In eight of its twelve television markets, Meredith’s stations are ranked either #1 or #2.
To remain relevant, the company adapts its portfolio to capture growth driven by changes in its audience’s tastes. Their 2016 launch of The Magnolia Journal, based on the highly-watched television series featuring Joanna and Chip Gaines, has become one of the industry’s most successful and profitable launches. Portfolio upgrades include a new quarterly magazine based on the widely-followed “Property Brothers” series, as well as new television shows that leverage their People and Southern Living magazine brands. Importantly, Meredith continues to re-format or cull fading titles.
Based on its strong local television market position, we think Meredith’s upcoming distribution and network affiliate contract renewals will have a limited yet slightly positive effect on the company’s profitability.
Meredith’s revenues and profits indicate its ability to monetize its content. The company is successfully increasing its non-advertising revenues, which now comprise nearly half of total revenues. Advertising revenues are slowly declining, but part of the issue is the unexpectedly weak early results from its acquired Time assets. However, advertising performance in these titles is turning around while television advertising remains healthy. Also, the re-alignment and expansion of its sales force and other initiatives are helping Meredith increase its print advertising industry market share to 36.2%. The company’s profits remain quite healthy, and are likely to grow this year net of the effect of political advertising last year.
Helping to further boost profits, the company has already achieved $430 million in cost-savings from the Time acquisition, with another $135 million still ahead. An upcoming change-over to a new core technology platform should improve its operating efficiency as well as generate more consumer data and engagement.
Meredith produces generous free cash flow, helped by its low capital spending requirements. The company’s top two priorities for this cash flow are to repay roughly $800 million more in debt and fund its well-covered and recently increased dividend. Meredith has already repaid $825 million of Time acquisition debt, partly with proceeds from asset sales, leaving its $2.4 billion in total debt at a manageable 3.3x EBITDA. High-margin political ad revenues likely coming in calendar 2020 would fund an extra one-time $100 million+ paydown.
Meredith shares trade at a discounted 6.8x forward EBITDA multiple. Its strong market position, attention to tactical and strategic changes to maintain its relevancy, solid financials and attractive dividend yield make for a compelling value stock.
We recommend the PURCHASE of shares of Meredith Corporation (MDP) with a $52 price target.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550, January 2020