Sector financial performance:

This company, which is primarily a publisher of women magazine (63% of total revenue) and an operators of local TV stations and earns revenue from magazine by advertising(48% and circulation 27%) and TV advertising, has been grouped into magazine sector in book industry.

It seems that the demand for print advertising of companies in this sector has been significantly decreasing in the past several years as indicated by the averaged decrease in organic print advertising revenue (average 10-15% annually in 2016-2018) due to decrease in both pages and price. While digital advertising revenue has increased, the average 3-4% growth in digital advertising revenue of companies in this sector has been far from enough to offset the declining revenue in their print advertising. We also see the decline in their subscription/newsstand revenue (2% annually) during the same period of time.

Declining revenue from its core revenue source has put huge pressure on companies’ gross margins (58% currently). However, benefiting from costs cutting, companies seem to be managing to keep operating margin at between 8-15% in 2018 with an average SG&A of about 44%.

The typical enterprise price/EBI ratio is 14-15.

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Company performance:

It seems that the demand for magazine adverting service of this company has been very weak and declined in the past several years (10% decline annually) and the decline seems to be accelerating recently. The demand for magazine (subscription) has been very weak and declined in the past several years (2% annually) and the decline seems to be accelerating recently. Digital advertising revenue has grown fast in the past several but not able to offset the decline in paper magazine. Price for print advertising has decreased.

The first nine months of fiscal 2018 compared with the same period of 2017

Organic magazine advertising revenue decreased about 10% (10% for down in pages).

Organic magazine circulation revenue decreased about 2.5%.

Non-political TV advertising revenue increased 4% (political decreased 90%).

The fiscal 2017 compared with 2016

Advertising revenue decreased 1%:

Magazine advertising revenue decreased 9% (5% for down in pages); digital advertising revenue increased 21%.

Magazine circulation revenue decreased 2%.

Non-political TV advertising revenue decreased 6% (political increased 380%).

Fiscal 2016 compared with fiscal 2015

Advertising revenue increased 6%:

Magazine advertising revenue (organic) decreased 5-10% (ad pages); digital advertising revenue increased 16% due to acquisition.

Magazine circulation revenue decrease slightly.

Non-political TV advertising revenue increased 5% (political decreased 70%).

Gross revenue increased in the past several years due primarily to increase in TV revenue (political advertising) and acquisitions. Its gross margin has gone down by about 100 basis points to about 58% in 2018 mainly due to acquisition. And with the flat SG&A as percentage of sales (to around 44%), its operating margin went down near to 14% in 2018.

Stock performance

This stock had a stock price/cash flow ratio of 13 based on financial data at Nov 2017 before agreement with Time was announced. We think that its stock is being relatively undervalued compared with $18.5 acquisition price of Time but overvalued compared with the price/cash flow ratio of 9 of Time, which is the ratio of Time before agreement was announced.

The current stock price of $50 may be consistent with the prices of both companies before combination.