Nielsen Holdings (NLSN, Financial) – or Nielsen –Â experienced its one-year low just last week before bouncing back up by 7% as of last weekend. The England and Wales-based performance management company reported its first-quarter fiscal 2017 in April.
For the first quarter, the $14.7 billion company delivered 2.6% sales growth to $1.53 billion and a disappointing 29% profit decline to $71 million – 4.7% profit margin vs. 6.7% in first-quarter 2016.
As observed, Nielsen increased by 220% to $32 million in relation to its restructuring charges accompanied by increased interest expense that help dampen the company’s bottom line.
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“Our first quarter results highlight the importance of our balanced portfolio. We saw continued strength in our Watch segment and in emerging markets, partially offset by a decline in the U.S. for our Buy segment.
“In our Watch segment, progress with our Total Audience Measurement system continued with the addition of out-of-home measurement and the commercial release of Total Content Ratings. In our Buy segment, despite the weak growth environment in the U.S., our productivity initiatives enable us to continue to invest in our measurement coverage and our Connected System, both of which are important to future growth. In addition, we are pleased to announce a 10% increase in our quarterly dividend as we continue to deliver on our ongoing commitment to enhance shareholder value over the long term.” –Â Mitch Barns, Nielsen CEO
Outlook
(Earnings release)
Nielsen expects higher sales growth in fiscal 2017 compared to its 2.22% growth rate in 2016 and 2.9% midpoint earnings-per-share growth compared to a 9.74% decline in 2016.
Shares of Nielsen declined by 3.85% at market close post-earnings announcement.
Valuations
Nielsen is overvalued compared to its peers with a trailing price-earnings (P/E) ratio of 31.2 times vs. the industry median of 20.9 times, a price-book (P/B) value of 3.6 times vs. 2.3 times and a price-sales (P/S) ratio of 2.3 times vs. 1.2 times (GuruFocus data).
The company also had a trailing dividend yield of 3.01% with a 94% payout ratio.
Average 2017 sales and earnings-per-share expectations would indicate a 2.22 times and 28.8 times*.
*Earnings per share of $1.43.
Total returns
Nielsen has performed poorly for its shareholders in the past year with 18.7% total losses compared with the Standard & Poor's 500’s 17.9% total gains (Morningstar data).
(Website)
Nielsen Holdings
According to filings, Nielsen Holdings was founded in 1923 by Arthur C. Nielsen Sr., who invented an approach to measuring competitive sales results that made the concept of “market share” a practical management tool.
Nielsen Holdings is a leading global performance management company. The company provides a comprehensive understanding of what consumers watch and what they buy and how those choices intersect.
In addition, the average relationship length with Nielsen’s top 10 clients, which include Coca-Cola Co. (KO, Financial), NBCUniversal, Nestle S.A. (XSWX:NESN, Financial), Procter & Gamble (PG, Financial), Twenty-First Century Fox (FOXA) and the Unilever Group (UN, Financial), is more than 30 years.
In 2016, 57%, or $3.63 billion, of its sales came from the U.S., 17% from Other Europe, Middle East & Africa, 13% from Asia-Pacific and the remaining from other countries.
Nielsen has two reporting segments: Buy (consumer purchasing measurement and analytics) and Watch (media audience measurement and analytics).
(10-K and 10-Q)
Buy
Neilsen’s Buy segment provides retail transactional measurement data, consumer behavior information and analytics primarily to businesses in the consumer packaged goods industry.
In the first quarter, sales in the Buy segment dropped by 4.5% to $757 million –Â 49.6% of total company sales –Â and delivered an operating margin of 4.5% vs. 6.6% in first-quarter 2016.
(10-K and 10-Q)
Watch
Nielsen’s Watch segment provides viewership and listening data and analytics primarily to the media and advertising industries across the television, radio, print, online and mobile viewing and listening platforms.
In the first quarter, sales in the Watch segment grew by 10.8% to $769 million, or 50.4% of total sales, and delivered an operating margin of 27% vs. 28.4% in first-quarter 2016.
Revenue and net income
(10-K and 10-Q)
On average, Nielsen had a three-year sales growth average of 2.66%, a profit decline average of 12.1% and a profit margin average of 7.8% (Morningstar data).
Cash, debt and book value
Nielsen had $451 million in cash and cash equivalents and $8.42 billion in debt – including capital lease obligations – as of March, resulting in a debt-equity ratio of 1.95 times vs. 1.63 times in the same period last year.
Further, 81.4% of Nielsen’s $16.33 billion assets were labeled as goodwill and intangibles having had a book value of $4.32 billion compared to $4.7 billion the year-prior period.
Cash flow
(10-Q)
In the first quarter, Nielsen experienced a 54% decline in its cash flow from operations having had lower profits in the period. Capital expenditures were $114 million leaving the company with $74 million in free cash (out)flow compared to $22 million free cash (out)flow in first-quarter 2016.
(10-K and 10-Q)
On average, Nielsen provided 118% of its free cash flow toward shareholder dividends and share buybacks in the past three fiscal years.
(10-K and 10-Q)
In the first quarter, Nielsen derived $481 million in debt proceeds net payments and other financing activities.
Conclusion
Nielsen exhibited slowing of business in one of its two segments –Â Buy. The positive thing for the company is that its other and more profitable segment –Â Watch –Â has been consistently growing and profitable in recent years.
Nonetheless, Nielsen had a highly leveraged balance sheet along with a lot higher mix of blue sky elements –Â goodwill and intangibles.
Despite this negative finding, Nielsen kept its shareholders satisfied, generously allocating more than its free cash flow toward dividends and share repurchases.
(Nielsen Holdings share price and P/S ratio, GuruFocus)
Eighteen analysts have an average price target of $46.39 –Â 12.8% upside from the share price of $41.13 (at the time of writing).
Meanwhile, applying the midpoint of Nielsen’s fiscal 2017 sales growth expectations, using three-year P/S multiple average and followed by a 20% margin, would indicate a value of $14 billion or $39.2 per share.
In summary, Nielsen Holdings is a pass.
Disclosure: I do not have shares in any of the companies mentioned.
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