Guest Review: Meredith Corporation - Printing Cash but for How Long?
Meredith Corporation (NYSE: MDP) is a media and marketing company that is geared toward women.The company publishes twenty magazines, including Better Homes and Gardens, Family Circle, Ladies’ Home Journal, Parents, American Baby, Fitness, and More as well as 120 special interest publications such as American Patchwork & Quilting, Country Gardens, and Diabetic Living. The company also owned a collection of twelve network-affiliated television stations and one AM radio station. Moreover, the company has been actively embracing technology with tablet editions of many of its leading magazines and 35 company owned websites.
I’ll start with the most attractive aspect of MDP: its cash flow.
There are several things to note here. First, the company has enjoyed strong and consistently growing cash flows throughout the period presented. Second, the company has relatively low capital demands, translating to strong free cash flows. To provide some context, I note that the company has generated on average $180 million in free cash flow over the last five years, which compares to a current market capitalization of $1.21 billion for a free cash flow yield of 14.9%. As I’ll show shortly, cash flows have grown largely in line with revenue growth, but for now I will note that the free cash flow margin has been extremely consistent in the 11 – 14% range for the last decade.
Here we see that the company has been using the bulk of its cash flow to paying down debt, which has declined by approximately 56% since 2006 from a D/E of 81% to a much more reasonable 32%. Perhaps even more attractive for shareholders, the company has consistently paid a healthy dividend since the late 1980s. In the period presented, the company paid out more than $425 million in dividends. The company currently has a dividend yield of 5.67%.
This chart shows the relative stability of margins over the last half decade, save for a non-cash impairment in 2009 of $295 million. The Gross margin line represents the company’s profits after “Production, Distribution and Editorial” which is the nearest relation to cost of goods sold. I present it merely to show the relative efficiency with which the company has generated revenues in relation to this key line item.
One thing to note is that a little over 1/3 of the company’s operating expenses result from paper, printing and postage costs which the company has little control over. Additionally, the company is somewhat at the whim of the US Postal Service (USPS) which has increased shipping rates in five of the last six fiscal years. It is well known that the USPS still has not solved its own financial troubles, which increases the likelihood of further rate hikes in the future. The company does not break out postage separately, which somewhat limits our analysis. One bright spot is the potential to shift more subscribers to the tablet edition of the company’s magazines, which will eliminate the variability of paper, printing and postage costs for a (slightly smaller) commission to Apple or Amazon.
The bulk (~55%) of the company’s revenues are derived from advertisers. Given advertisers’ interest in being seen, it is important to keep an eye on the company’s circulation, as a sustained decline in circulation could portend future declines in advertising revenue. The following chart shows the company’s revenue split between Advertising, Circulation and “Other” which includes brand licensing, book sales, etc.
Here we see one of the main concerns about MDP. Paying attention to its circulation revenues (the red portion of the bars), we see quite substantial declines beginning in 2006, amounting to a 27% reduction. Unfortunately, the company does not provide circulation data for individual magazines, so again our analysis is necessarily limited and we are unable to determine whether the problems are limited to select magazines or whether this is a broad decline. The company does provide information on advertising pages among the larger magazines, but it would be helpful to have subscription information to match up.
With respect to advertising revenues, it is worth noting that, heading into an election year in the United States, we might expect demand for advertising to increase. I note this not because it will have any effect in the long-term, but that dramatic improvements in revenue sometimes act as the necessary catalyst to draw the market’s attention, even if the improvements are only temporary.
One more thing to note is that the company has a dual class share structure, with Class B shares being entitled to ten votes each versus just one vote per common share. Class B shares represent just 19.5% of the economic value of the company, but comprise 70.8% of the voting rights, and the ownership of Class B shares is restricted to the company’s founding family. I am never a fan of this type of structure, but given the company’s use of free cash flow in the past, I am somewhat less worried here. One thing worth noting is that in addition to a strong dividend, the company also has an active share repurchase program. However, despite the decline in share price the company does not appear to be interested in being more aggressive than it has historically:
On the repurchase, as Joe said we’ve got to weigh that against a number of different alternatives and we believe that there are going to be a number of interesting opportunities in the marketplace to add to our portfolio over time as we go forward. And certainly there is much more action than there was a year ago or 18 months ago, really across not only print but digital and also on the broadcast side; and we wanted the ability to step in and be aggressive as Joe said in an opportunistic way when we looked at all the parameters and we had excess cash to do so, but we also want the flexibility over time to add to our portfolio in a way that we think makes longer-term sense for the business.
Ok, so where does this leave us? With MDP, I see a historically strong performer in terms of free cash flow currently operating with one of the best balance sheets it has ever had. Though I am unimpressed with the dual class share structure, I have seen nothing but shareholder friendly actions in terms of both dividends and share repurchases. I worry that the company will ratchet up debt like it did in 2005 for a large acquisition which would add considerable risk, and I worry that the company’s ad revenues will decline should circulation continue to decline. If you can get past these risks, and believe that historical free cash flows are sustainable, even in a no growth scenario, the company’s shares would be worth significantly more.
What do you think of MDP?
Author Disclosure: No position
Disclosure: Steve owns no stocks referenced here.
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