Time Inc. (TIME) Chief Executive Joseph A. Ripp was quoted in the New York Post earlier this year saying, “debt is good.” He said he didn’t mind the fact that Time Warner (TWX) saddled his business with more than $1 billion in debt when it spun it out in the second quarter. His rationale? All that debt would keep private equity “away.”
That has to be the dumbest thing I have ever heard and seems even stupider in light of yet another mediocre earnings report Wednesday from the New York-based company. Were it not for the company’s huge debt load, private equity firms would have snapped up Time Inc. even before Time Warner unceremoniously kicked it to the curb in the much-anticipated spin-off, which was completed June 6.
What Wall Street often forgets about legacy print media businesses, such as magazines and newspapers, is that they are still profitable. As USA Today media columnist Michael Wolff noted in May, Time Inc. generates nearly $400 million annually in cash. He called it a “private equity dream.”
That’s no exaggeration. Time Inc. has some phenomenal brands such as People, which has had the most ad pages of any magazine for 11 straight years. In 2013, it earned a whopping $1.06 billion in ad revenue. Time may be a dinosaur. but it sold more than $372 million worth of ads. Fortune garnered $213 million worth of ads.
Ironically, Time Inc.’s advertising business is doing better than expected. Net income slumped to $48 million, or 44 cents per share, versus $68 million, or 62 cents, a year earlier. Excluding one-time items, profit was 41 cents. Revenue rose to $821 million. The results beat the 36 cent profit and $817.6 million in sales estimates that the few Wall Street analyst who bother to follow the company forecast.
But the underlying trends remain worrisome. Time slashed its revenue outlook for the second time since August noting “weak print advertising booking trends.” During the latest quarter, print ad sales slumped 1 percent to $363 million while the digital business gained 5 percent to $65 million. Other major parts of Time‘s operation, including circulation and newsstand sales, posted declines. Overall revenue has slumped for 5 out of the past 7 years. The stock opened higher on Wednesday, but slumped in morning trading to $21.30 a share, about where it closed the night before.
Although I was tempted to recommend investors buy Time Inc. stock for its cash flow, it is too expensive. It trades at a multiple topping 87, a richer valuation than Facebook’s (FB) price-to-earnings ratio of 70. There are far better places for investors to put their money. A shoe box comes to mind.
Speaking to analysts on the earnings conference call, Ripp argued that Time was considering any transaction that made “sense.” He has already laid off workers, so some kind of deal is the next logical step. A sale of all of Time Inc. seems unlikely, although it remains a possibility. It could sell individual magazine titles. One of Ripp’s biggest challenges will be to make sure that top talent at the magazines don’t bolt because of the company’s uncertain future.
Turning around Time’s underlying business faces daunting odds. Just ask Reader’s Digest, which has filed for bankruptcy twice in recent years, or Martha Stewart Living Omnimedia (MSLO), which has struggled for years and recently outsourced its non-editorial magazine functions to Ladies Home Journal owner Meredith (MDP).
Speaking of Des Moines-based Meredith, there have a been rumors the company would join forces with Time Inc. in some sort of deal. That’s still a possibility. Although, as I previously noted, the magazine publisher doesn’t need to do anything because it generates enough cash to muddle through just fine on its own.
Investors, however, probably won’t have the patience to buy Time stock if the likely outcome is to watch the company slowly fade away.
Jonathan Berr doesn’t own shares of the aforementioned stocks.
