Meredith Corporation (MDP) recently posted better-than-expected third-quarter 2012 results on the back of healthy demand for non-political advertising at its Local Media Group, improving trends witnessed across National Media advertising, and increased readership and online traffic.
The quarterly earnings of 66 cents a share beat the Zacks Consensus Estimate by a penny, but dropped 2.9% from 68 cents earned in the prior-year quarter. On a reported basis, including one-time items, earnings dipped 29.9% to 47 cents from 67 cents delivered in the year-ago quarter.
Management now expects earnings in the range of 63 cents to 66 cents for the fourth quarter and between $2.47 and $2.50 per share for fiscal 2012. The quarterly as well as fiscal projections are diluted by 10 cents and 12 cents, respectively, due to the impact of the acquisition of Allrecipes.com.
The current Zacks Consensus Estimates for the fourth quarter and fiscal 2012 are 73 cents and $2.57, respectively. Consequently, we could see a correction in the Zacks Consensus Estimates in the coming days with analysts revising their estimates to better align with the company’s earnings outlook.
Total revenue for the quarter grew 2% year over year to $345.5 million, reflecting an increase of 3.4% in advertising revenue to $191.5 million and a jump of 14.9% in circulation revenue to $76.3 million, partially offset by a decline of 10.9% to $77.7 million in other revenue. However, total revenue fell short of the Zacks Consensus Estimate of $350 million.
Operating expenses for the quarter rose 7.2%, reflecting an increase of 1.5% in production, distribution and editorial costs, 12.1% in SG&A expenses, and 14.5% in depreciation and amortization.
Segment Details
Meredith’s National Media Group revenue slipped marginally by 0.1% to $267.6 million, attributable to a decline of 15.1% in other revenue, offset to a large extent by a 1.6% growth in advertising revenue and a 14.9% rise in circulation revenue. Excluding the recent acquisitions of Allrecipes.com, “EveryDay with Rachael Ray” and “FamilyFun” advertising revenue would have been down 7.2%, whereas circulation revenue would have been up only 3.3%.
The over-the-counter drug, and media and entertainment categories showed robust trends, whereas food and beverage category also performed well due to the recent acquisitions. However, sluggish performance was witnessed across prescription drug and retail advertising. The company hinted that digital advertising revenue surged 70%.
Segment EBITDA declined 20% to $41.4 million with EBITDA margin contracting 380 basis points to 15.5%.
Meredith now projects National Media Group advertising revenue to increase in the low-teens during the fourth quarter of 2012. However, excluding the recent acquisitions advertising revenue is expected to decline in the mid-single digits in the quarter.
Meredith’s Local Media Group revenue rose 9.7% to $77.9 million. Non-political advertising revenue increased 4.9% to $66.7 million, reflecting a tenth successive quarter of year-over-year enhancement. Political advertising revenue came in at $1.8 million, up from $682,000 in the year-ago quarter.
Other revenue jumped 38.8% to $9.4 million. Automotive advertising revenue climbed 4%, whereas digital advertising revenue soared 70%. Professional services revenue increased 11%. Management hinted that non-political advertising revenue is pacing up in the mid-single digits in the fourth quarter of 2012.
EBITDA at Local Media Group was $30.1 million, up 55.5% from the prior-year quarter, whereas EBITDA margin came in at 38.7% compared with 27.3% in the prior-year quarter.
Meredith’s Growth Catalysts
It’s been a constant endeavor of Meredith to explore and add alternative revenue generating channels through acquisitions or by entering into strategic alliances. Thereby, the company attempted to reduce its dependence on conventional advertising.
The sluggish economy prompted Meredith to diversify and add significant revenue streams beyond traditional advertising by leveraging its brands through strategic alliances. Brand Licensing revenue supplemented the sales of the company, led by a rise in sales of Better Homes and Gardens’ branded products at Wal-Mart Stores Inc. (WMT). The company extended its contract with Wal-Mart Stores through 2016, which includes an expansion of the Better Homes and Gardens branded home decor and garden program at Wal-Mart stores across the United States and Canada.
Meredith remains committed to make strategic investments to increase its revenue generating capabilities and enhance its profitability. The company is aggressively expanding its brands through online platforms, televisions, videos, mobile applications, and is expanding its reach of food and lifestyle content across tablet products, such as the iPad, NOOK Color, Kindle Fire, and Samsung Galaxy.
Following its growth trajectory, Meredith acquired “Every Day with Rachael Ray” the award-winning magazine of Reader’s Digest Association, and assets of “FamilyFun” magazine from Disney Publishing Worldwide.
Recently, Meredith acquired the world’s No. 1 digital food site, Allrecipes.com for about $175 million, to expand its digital platform. However, the transaction will hurt Meredith’s fiscal 2012 results, but it will be modestly incremental to its earnings per share and free cash flow in fiscal 2013.
During the quarter, readership across Meredith magazines climbed to a record of 115 million.
Other Financial Details
Meredith ended the quarter with cash and cash equivalents of $24.7 million, total long-term debt of $420 million and shareholders’ equity of $800.3 million. The increase in total debt was due to the acquisition of Allrecipes.com.
During last twelve months ending March 31, 2012, the company generated cash flows from operating activities of $180 million and repurchased about 1.1 million shares. The company’s leverage ratio (debt to EBITDA) was 1.8 to 1.
Currently, we maintain our Neutral recommendation on the stock. However, Meredith retains a Zacks #4 Rank that translates into a short-term Sell rating.
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