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After a Spate of Acquisitions, It’s Time for Profits

Patricio Kehoe

Patricio Kehoe

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Over the past few years, the leading media and marketing company in the U.S., Meredith Corporation (MDP), has made a point of purchasing company’s and brands that would enhance its interest in publishing, broadcasting, marketing, and interactive media. And although talks about acquiring Time Warner Inc. (TWX)’s Time magazine were unsuccessful, Meredith’s financial results and future outlook are still looking promising. While the current EPS growth rate of 6.3% is not stellar, management reiterated that the company’s acquisition load will contribute to the quarterly $302.1 million saved in operating expenses, due to a 1.4% decrease in production, distribution, and editorial costs.

A Long Trail of Acquisitions to Boost Growth

With a 3.48% dividend yield and 14.5% returns on equity, this firm has very positive stewardship for its shareholders, something which investment gurus like Paul Tudor Jones (Trades, Portfolio) and John Hussman (Trades, Portfolio) surely appreciate, thus leading them to buy the company’s stock last quarter. And I’m not surprised by this choice, as Meredith has been making substantial efforts to expand its digital presence, broaden its television portfolio and gain more market share in the long term. With 20 subscription magazines and about 120 special interest publications under its wing, the firm targets the home and family markets via its Better Homes, Parents and Gardens titles. However, 2011’s launch of Recipe.com, the recent acquisition of No.1 digital food site Allrecipes.com (for $175 million), as well as Parenting and Babytalk magazine and digital assets have enhanced the company’s scale significantly. Moreover, the market share gain should contribute to boosting advertising revenue in the digital space, which is crucial to future growth.

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Nonetheless, as currently half of the firm’s revenue stems from advertising, management has been refocusing its efforts to develop the marketing service segment and brand licensing. For this purpose, Meredith recently extended its contract with Wal-Mart Stores Inc. (WMT), in order to expand its Better Home and Garden brand programs throughout the U.S. and Canada. But in addition to expanding its brands via multiple platforms and widening the range of its content, this company is set on growing in the broadcasting space as well, having renewed its long-term affiliation agreements with CBS Corporation (CBS) and Twenty-First Century Fox (FOX). This, in addition to the television stations purchased from Gannett and Sander Media LLC ($407.5 million), will help boost the current slow revenue growth of 2.4% significantly by generating approximately $110 million by 2015.

An Upward Tend

Although Meredith has grown stronger every year, and management believes fiscal 2014 will reflect the past investments profitability, it may still be a couple of years until financial results show substantial increases. Nonetheless, I remain convinced that this media firm is an attractive option for investors seeking long term growth and solid profits. Not only are operating margins at a stable 14.33%, but the Total Shareholder Return (TSR) strategy assures a consistent dividend increase, which the company has never failed to reach in 67 years. With the dividend currently at $1.73 per share, shareholders can expect this value to continue growing as the company’s plan to buy back 1.2 million shares for the first half of fiscal 2014 is well under way.

I also remain impressed by Meredith’s cash flow and debt ratios. For a company that initiated a spate of purchases since 2011, debt has doubled to $300 million, but the free cash flow levels of $163 million have also increased since 2012. Thus, I’m confident the firm won’t face greater issues in terms of leverage and as its market share grows, so should its cash flow. So, with the stock’s trading price only 3% above the industry average of 17.8x, I believe Meredith is an accurately priced and worthwhile investment, with much room for growth.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 5.0/5 (1 vote)

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