Meredith Corporation: Outlook Has Not Improved

I’ve written about Meredith (MDP) in the past, warning how the company had all the possible signs of a “value-trap”. Five months later, cheap has become cheaper as the stock fell by 30% since my article. The company recently released its fourth-quarter and full-year results, and my opinion has not changed at all. I still believe that Meredith is a possible “value-trap”.

Note: As discussed in my previous article, Meredith operates two segments, the National segment and the Local Media Segment. The National Segment consists of a variety of physical magazine brands as well as digital assets/websites. The Local segment consists of 17 local TV stations owned by Meredith. The National Segment made up 73% of the company’s revenue in 2020, but only a fraction of operating profit.

In terms of Q4 2020, Net Revenue declined by 22% to $611 million compared to Q4 2019 Net Revenue of $786 million. These results weren’t too bad as the declines were attributed to coronavirus related advertising cancellations and the “right-sizing” of the company’s magazine business. The shrinking of the magazine business was planned and resulted in a reduction of revenue of $40 million. Therefore, revenue decline due to coronavirus-related disruptions was $154 million or an organic decline of 18%.

The company’s 4Q 2020 EBIT was $6 million compared to a -$4 million loss the same time last year. Cash flow from operations was up by 33% compared to the prior period, indicating some success in the company’s initiatives to return to profitability. Operating profit for the National segment was flat for the quarter at $6.8 million, compared to $6.4 million the same time last year. Operating profit of the local media segment fell from $62.6 million in Q4 2019 to $28.4 million this quarter. Like most industries, the company’s 4Q 2020 results suffered due to the coronavirus pandemic.

The full-year 2020 fiscal results (ended June 2020) paint a grim picture for the company. Full-year 2020 revenue declined by 11% to $2.8 billion compared to the same time last year. The loss from operations in 2020 was -$209 million compared to positive earnings a year prior of $129 million driven by non-cash impairments of goodwill and intangible assets. You may think these non-cash expenses are not a big deal. However, in the context of Meredith’s massive long-term debt of $2.98 billion, these expenses reduce equity and therefore impact the company’s leverage ratios. EBITDA fell from $706 million in 2019 to $548 million in 2020, a decrease of 22%.

Compounding the issue is that Meredith was a company on a decline even prior to the coronavirus pandemic. The overall trend of the decline of print media was already affecting the company. I fear that these trends may have accelerated due to the coronavirus pandemic.

Print media is one of the businesses that was disproportionately affected by the coronavirus crisis. The reason for this is because offices and stores such as dentists, salons, and coffee shops have most probably removed their magazines. As physical objects that multiple people pick-up and browse through while waiting, magazines are a vector for COVID-19. This was really more of an acceleration of an already present trend. Once customers are used to offices without magazines, I doubt they would feel the need to re-start their subscription when things return to normal. While the company has a portfolio of digital assets/websites that gather 155 million unique visitors monthly, this part of the business has not really grown at a rapid rate. In 2020, Digital revenues have been mostly flat at $449.6 million compared to $451.7 million a year prior.

As mentioned in my previous article, the local business segment is the true asset of the company. During the height of the coronavirus pandemic, a time when tensions were high and access to accurate information was vital, many Americans surprisingly turned to their local news stations for information. It could be that during those times, local interests were more important for what to do next.

Local television stations are experiencing a rare surge in viewership as more Americans tune in for coronavirus updates. But the stations are unlikely to benefit financially because of a cutback in advertising spending.

“We have more viewers than ever, but advertisers are unfortunately stuck in the same economic boat as many of us,” said Patrick McCreery, president of the local media group of Meredith Corp.

Wall Street Journal: “Local TV Sees Spike in Viewers, Drop in Ads in Coronavirus Crisis”

The company has begun taking steps to make selling this asset a possibility. The company will seek shareholder approval this November for an amendment to its charter (as required by Iowa law), increasing options for a potential tax-efficient separation of its National and Local media groups. Prior to the pandemic, a broadcasting company when sold was able to fetch an EV/EBITDA multiple of 10-11x as shown by the multiple offers for TEGNA (TGNA) at that price range. However, given the trend of reduced advertising revenue mentioned above, a broadcasting station may no longer command such multiples due to the steep decline in TV advertising revenue. While viewership may have increased, advertising revenues are down. TV advertising as a whole is expected to shrink by 11.7% in 2020.

Looking at the stock prices of broadcasting stations such as Gray Television (GTN), TEGNA, and Sinclair (SBGI), share prices of these companies remain down from February/March highs. Looking at the EV/EBITDA multiples of these firms, they now have EV/EBITDA multiples lower than the proposed TEGNA deal. Sinclair has EV/EBITDA multiple of 8.5x, Gray Television a multiple of 8.1x, and TEGNA a multiple of 9.2x. These are lower multiples than the deal given to acquire TEGNA.

Now you might make an argument that all Meredith has to do is to wait until there is an economic recovery before making the sale. However, the company’s massive debt is putting pressure on the company to act quickly. Remember Meredith management is not a stranger to selling assets at a massive loss. The company’s debt has actually increased in 2020 from $2.33 billion to $2.98 billion. Given these risks, I reiterate my “Avoid” recommendation for Meredith.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Caveat emptor! (Buyer beware.) Please do your own proper due diligence on any stock directly or indirectly mentioned in this article. You probably should seek advice from a broker or financial adviser before making any investment decisions. I don’t know you or your specific circumstances, therefore, your tolerance and suitability to take risk may differ. This article should be considered general information, and not relied on as a formal investment recommendation.

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