In June of 2014, Time Warner (TWX) spun-off TIME Inc. (TIME) into a separate company. As with most separations, management believes the spin-off “will enable Time Inc. to benefit from the flexibility and focus of being a stand-alone public company”.
Since the spin-off, shares of TIME have underperformed its former parent by roughly 20%. Is there still opportunity in TIME shares, or was Time Warner simply shedding itself of a less attractive business?
The Business
Time Inc. is the largest magazine publisher in the U.S. based on both readership and print advertising revenues with over 90 magazine titles globally, including PEOPLE, Sports Illustrated, InStyle, TIME and Real Simple. TIME has a total of 23 magazines published in the U.S., 70+ magazines published internationally (U.K., Mexico), as well as ~70 million online monthly viewers across 45 websites globally.
History
The State of the Magazine Industry
In 2013, advertising made up 67% of all magazine industry revenues. 91% of all adult Americans read magazines and 59% of readers took action or plan to take action as a result of exposure to specific print ads. An impressive 25% of digital readers also say they have increased time spent with magazines.
Meanwhile, top publishers such as TIME are taking share. The share for the top four publishers has increased from 64% in 2009 to 68% in 2013.
This market consolidation has helped TIME create a portfolio of market dominating brands.
Even so, the industry is still shrinking. TIME has experienced revenue drops across all three of its sales segments: Subscription, Newsstand, and Advertising.
Management
As TIME had operated as a segment of Time Warner for some time, they already had hiring access to an experienced and capable management team.
Valuation
While the earnings base is clearly in decline, the business still throws off a fair amount of cash, with minimal capex necessary to sustain its position.
Earnings this year are expected to be $1.22 per share.
Using that as a base, we can use GuruFocus’ Reverse DCF tool to estimate what growth assumptions are currently priced into the stock. Currently, it looks like investors are expecting around 10% annual EPS growth over the long-term. With a declining earnings base, this would be terribly difficult to achieve.
Conclusion
While the company has an enviable portfolio of prestigious, market-dominating brands, shares are simply too expensive to purchase at todays prices.
For more ideas like this one, check out GuruFocus’ Spin-Off List or the rest of R. Vanzo’s Articles.
