Description

This is mostly a write-up about why we are short Meredith (MDP). I think it is a good stand-alone short because it is overvalued. If you are in the “Richard Greenfield linear TV is going to zero” camp then I think it is a fantastic short. However, I especially like this as a hedge to a long GTN position, or any beaten up media name you may be long (YTD performance – MDP +28%, while GTN: -29%, SBGI: -10%, NXST: -7%, FOXA: -6%).

Back in January, Wells Fargo wrote, “While Local (TV) appears to be a bright spot given a very positive tone on today’s call, National (magazines) is still a drag & MDP’s valuation still puzzles us – MDP trades at 7.5x blended C‘15/C’16 EBITDA, which is in-line with broadcasters despite 40-45% of EBITDA from the lower margin, lower growth National business.” The stock has risen 35% since then, while GTN, SBGI and SSP are down high single digits and NXST is up 24%.  Meredith (MDP) is currently trading at 9.3x blended ‘16/’17 EBITDA. Around 60% of their EBITDA comes from local broadcasting, which is similar to peers such as Gray Television, Nexstar, Sinclair and Scripps. These peers trade at an average EBITDA multiple of 7.2x. The remaining 40% comes from a national publishing business that is similar to Time Inc (TIME), which trades around 5x. Historically, MDP has traded at a slight discount to pure-play broadcasters. Today it trades at a 27% premium. A sum of the parts valuation on MDP using peer multiples implies +40% downside.

The following table does a nice job illustrating the valuation dislocation that exists between MDP and similar businesses. MDP is the red line. The business that’s most similar to 40% of their EBITDA is the blue line.

Most attribute the outperformance to MDP’s under-levered balance sheet (they are levered <2x EBITDA, while broadcast peers are 4-5x), 3.5% dividend yield (100 bps higher than SBGI) and well-received narrative surrounding their exposure to digital revenues in their national publishing business (30% of national ad revenues, or 9% of total revenues, growing at low double digits which maybe keeps national media segment flat). I think these are ephemeral reasons for stock outperformance and they do little to differentiate business quality between MDP and peers. Outside of these explanations, you have a stock that is trading at a near historically high multiple when everyone else is trading near historically low multiples.

Meredith’s Broadcasting Portfolio is Average, at Best

The best broadcast assets are dominant, #1 rated stations in smaller markets and the weaker assets are lower ranked stations in large markets. MDP’s portfolio of stations has the second highest weighting of any public comp to large markets (TRCO’s markets are slightly larger). While they own the number one or number two rated station in 75% of their markets (peers are 60% #1/#2), their rankings in their largest markets are weak.

The following table highlights quarterly non-political, same-station ad trends for several broadcasters, exposure to large markets and their concentration in highly ranked stations. I’ll also use this as an opportunity to mention that I think GTN is one of my favorite longs right now.

Source: Company Filings, Earnings Call Transcripts and Sellside Research

Note: For purposes of this table we translated comments such as “few” and “low single digits” to their generally accepted numerical equivalent and took the midpoint of any defined range.

Conversations with station owners suggest that smaller markets generally grow at 200-400 bps higher rates than larger stations. To the extent that broadcast advertising faces long-term challenges, we believe that the tail will be much longer and flatter in smaller markets where local news is more important and competition for advertising dollars is lower. I think GTN’s outperformance supports this concept. I would call out NXST underperformance as a bit of an anomaly attributable to lower quality operations (industry people we talk to have a somewhat negative view) and TRCO’s outperformance as an outlier which is attributable to a rebound at WGNA following new series launches.

If networks continue to push their take of retrans revenues through higher reverse compensation splits (and they will), then we expect that the larger markets will be most at risk. It is much easier to find a replacement broadcaster in a large market. The networks carry a big stick and they have been known to deliver a few blows. Just look at the markets where you’ve recently seen networks change affiliates – NBC is cutting off third-ranked WHDH (owned by Sunbeam) in Boston, CBS pulled their second-ranked Indianapolis affiliate (owned by LIN Media) and Fox nearly (http://www.wsj.com/articles/tribune-media-signs-deal-to-keep-seattle-tv-station-affiliated-with-fox-network-1413573585) cut out its fourth-ranked affiliate in Seattle (owned by Tribune). In Meredith’s largest market, Atlanta, their CBS station ranks fourth (http://radiotvtalk.blog.ajc.com/2016/08/15/atlanta-tv-ratings-wsb-tv-dominates-most-of-the-day-in-local-news-and-programming/). In their third largest market, St. Louis, their CBS stations is ranked third (http://www.tribunemedia.com/fox-2-was-the-most-watched-st-louis-station-in-may-3/). While I don’t expect that MDP will lose any of its affiliate agreements, I think their bargaining power in several of their markets is quite weak. Over time, their results should, at best, match those of their publicly traded peers. If you value the local media business in line with peers, then you would need to value their national media business at 12.5x EBITDA. So let’s take a look at it.

National Media Business is Not Worth 12.5x EBITDA

The National Media Group business is a collection of women’s media brands (list here: http://www.meredith.com/national-media/brands) such as Better Homes and Gardens, Shape and allrecipes. Revenues for FY 2017 estimates breakdown as follows: 34% Print Advertising, 20% Print Circulation, 22% Other (mostly brand licensing), 14% Digital Advertising and 10% Digital Circulation. The digital business is growing high-single to low double digits, the print business is declining mid to high single digits and “other” is declining mid to low single digits (if your licensing business is declining then what does that say about the value of your brands?). Add it up, and you have a business with flat to slightly declining top-line and low single digit EBITDA declines.

Besides the fact that this a stagnant business that just doesn’t deserve a growth multiple, it has also been a major source of capital destruction. There are some that subscribe to the notion that MDP can use its magazine/digital ad platform to consolidate the industry in a way that delivers value. Some suggest that MDP could do some kind of a merger with TIME that creates value. I don’t think these thoughts are good ones.

Taking the second issue first, TIME’s EBITDA is +2x MDP’s national media business. TIME’s EBITDA is larger than all of MDP. It would be a very large acquisition for MDP and I would have to imagine that it would weigh heavily on the multiple of the go-forward business. Furthermore, if MDP conducts any form of self-evaluation into their historical forays into consolidating the magazine space, they will likely conclude that a TIME purchase is a bad idea.

The following table highlights M&A spending for the national media business, historical EBITDA generation and sellside estimates for the next two years.

Source: Company Filings, Earnings Call Transcripts and Sellside Research

You can cut this any number of ways that will reveal a combination of 1) implied core EBITDA declines and 2) really bad use of shareholder dollars. But however you cut it, spending $485MM over eight years on a business that consistently does mid to high $100s EBITDA and actually posts a $3MM EBITDA decline over that period suggests that you’re working with something that deserves a pretty low multiple.

And it’s not even like there is some narrative that suggests the business is about to turn in any meaningful way. I’d reference the most recent earnings call when an analyst asked about the national media business, their “favorite side of the ledger” (and he wasn’t kidding):

Q: Can you just go over maybe some of the puts and takes on sort of how you see revenue pacing over the balance of the year; maybe remind us of timing of events and how rapidly digital could grow? Could we see it be a third of revenue in fiscal 2017?

A: … We expect the digital part of the business continue to be very robust. We've been talking about digital growth put together with print, netting out to where it would be on a same-store basis, up rather than down. I think we're right in that ZIP code.

Suffice to say, if MDP’s national media business were to trade on a stand-alone basis that provided a clearer window into their historical performance I do not believe it would trade anywhere near its current implied valuation.

MDP’s Growth Lags by a Lot

Over the past five years the local broadcaster space has consolidated meaningfully. Throughout this consolidation, peers such as GTN and NXST have grown their cash flow by ~4x. Meanwhile, MDP’s cash flow has grown 38%. Their adjusted EPS has grown a paltry 18.7%. The following table highlights the comparative FCF/share growth.

With the exception of the MEG/NXST deal, M&A activity in the broadcast industry has come to a halt as the FCC works through its spectrum auction. We expect that activity will pick up meaningfully next year. Though we have high hopes for the opportunities that this will provide for GTN to continue to consolidate highly rated, small market stations and step up acquiree’s retrans to those of GTN, we do not expect that MDP will find many exciting opportunities. Competition for large market stations is higher and there is less opportunity to deliver value through revenue (ie retrans) and cost synergies. Even so, if MDP does pursue meaningful M&A then they will either need to access the equity markets or issue debt in a manner that makes them just as levered as their peers, eliminating the most commonly cited reason for their elevated multiple.

Debt Level Shouldn’t Warrant Multiple Discrepancy

Having debt as a part of your capital structure creates a tax shield. This tax shield has value. Many will argue that businesses with debt should trade at a higher EV/EBITDA multiples to account for the value of tax shields. I don’t want to wade into the vagaries of business valuation theory, but I don’t agree with the notion that higher debt levels warrant depressed unlevered valuation metrics; particularly when the debt markets are showing no signs of stress whatsoever.

GTN Q2 2016 Earnings Call

“A couple of quick comments on both our 2026 senior notes that we issued in June and our 2020 notes. First of all, our2026 notes, we were delighted with that offering. The $500 million of notes priced at 5.875%, which is the lowest coupon rate we've ever issued a bond at and it's the longest tenured bond we've ever issued. And at the same time, we were pleased that Moody's and S&P upgraded our credit profiles.”

Jim Ryan, CFO

(This note now trades at 104% of par, a 5.2% YTM)

NXST Q2 2016 Earnings Call

“As I mentioned before, there has been an improvement in the borrowing environment since we established our original Nexstar Media Group free cash flow projections of over $500 million of annual free cash flow or an average pro forma free cash flow per share of approximately $11.15 per year over the 2016-2017 period.”

Tom Carter, CFO

And it’s not even just about lower rates in a ZIRP world. Here is a two year chart of the yield spreads for SBGI’s $550MM 2024 Sr. Unsecured bonds that were issued in July 2014.

Spectrum

Meredith does not have much, if any, excess spectrum and likely will not realize any proceeds from the spectrum auction.

Failed MEG Merger

In September 2015, MDP tried to sell themselves for $51.53/share, with cash comprising 67% of the consideration. The stock is currently 7.4% above that price.

Risks

Accretive M&A

People stop using the internet and return to reading magazines

Previously non-existing barriers to entry for writing recipes, fashion tips or parenting advice suddenly emerge

The ideas expressed in this posting are the views and opinions of the author of this posting (Author).  Author has no obligation to update any of the information contained herein and has no obligation to update the posting to reflect any changes in the Author’s opinion on any of the companies or topics contained herein. Do not rely upon the information contained in this posting for making investment decisions; prepare your own analysis or contact your financial advisor.  While the Author has tried to present facts it believes are accurate, the Author makes no representation as to the accuracy or completeness of any information contained in this note.  Past performance is not necessarily indicative of future results, and there can be no assurance that targeted or projected returns will be achieved.

Catalyst

The market wakes up