Description

I believe Nielsen’s business is a highly defensible quality compounder trading at a very reasonable (especially in this environment) 16.4x ‘18 and 13.9x ‘19 adjusted EPS and a 7%+ 2018 FCF Yield (despite heavy investments in 2018).  It will continue to dominate the TV/video measurement business - like it has for nearly 70 years. Its retail data business will also continue to be an industry standard and return to growth.

Background

Nielsen was founded in 1923 as a company focused on the testing of conveyor belts.  By 1929 it had entered the consumer survey business. By the 1930s it began measuring grocery store sales and also radio audiences.  Arthur Nielsen invented the concept of “market share.” In the 1950s it entered the TV measurement business. In the 1970s it came up with the concept of national TV ratings.  Learn more about the company’s history here: http://sites.nielsen.com/90years/

Today Nielsen divides its business into two segments “Watch” and “Buy.”  The Watch segment “provides viewership and listening data and analytics primarily to the media and advertising industries across the television, radio, print, online, digital, mobile viewing and listening platforms.”  It represented 51% of Nielsen revenue in 2017 and generated ~72% of operating profits. Operating margins are a healthy 44%. The company provides its offering in over 31 countries (but doesn’t break out the mix between developed and emerging markets).  Marquee clients for this segment include: CBS, Clear ChannelMedia, Disney/ABC, Facebook, Google, Microsoft, NBC Universal/Comcast, Twenty-First Century Fox, Time Warner, Twitter, Univision and Yahoo! on the media side; advertising agencies such as WPP, IPG, Omnicom, and Publicis; telecom companies such as AT&T, Verizon, Vodafone, and Nokia; and automotive companies such as Chrysler, Ford and Toyota. At the beginning of the year about 80% of Watch segment revenue is already contracted under multi-year agreements.

The Buy segment “provides retail transactional measurement data, consumer behavior information and analytics primarily to businesses in the consumer packaged goods (“CPG”) industry.”  It represented 49% of Nielsen revenue in 2017 and generated ~28% of operating profits. Operating margins are 18%. Its global mix is 64% developed markets (US/Canada/Europe/S. Korea/Australia) and 36% emerging markets (China/India/SE Asia/Africa/Latin America).  Marquee clients for this segment include: The Coca-Cola Company, Nestle S.A., Unilever, and The Procter & Gamble Company on the CPG side and Carrefour, Tesco, Walgreens and Walmart on the retail side. At the beginning of a typical year 60% of this segment’s revenue is already contracted.

Nielsen stock is currently trading at around 5 year lows.  Why?

The primary reason seems to be a significant slowdown in the Buy business.  Revenue shrank modestly for the last couple of years in this segment as CPG companies have implemented zero based budgeting (think Kraft Heinz under 3G’s ownership) and cut back all of Nielsen’s non-essential analytics consulting projects.  The problem has been compounded by heavy investment in a new Connected System platform that provides consistent real-time data and analytics to retailers and their suppliers in a cloud-based platform. Walmart is rolling it out, which is a huge win for Nielsen, but as with most Nielsen products the roll out involves most of the cost for them upfront as they install the system to over 50 Walmart suppliers and the cash flows come back in over a number of years.  The market is extrapolating the lack of growth and margin pressure in our view.

My variant view

At this point, it seems like CPG companies have cut what they can cut.  Poster-child 3G is starting to have to focus on innovation instead of merely cost cutting (See: https://www.bloomberg.com/news/features/2017-08-02/why-the-hatchet-men-of-3g-spent-10-million-on-a-better-oscar-mayer-weiner).   In fact, many CPG firms are struggling with revenue growth and looking for ways to reignite it instead of just cut costs, so Nielsen may yet begin to pick up new consulting projects again.  In addition, as the new Walmart “One Version of the Truth” program ramps up, that should provide a nice tailwind for this segment once the initially heavy investment begins to be harvested later this year.  Finally, emerging markets continue to grow for Nielsen and should become a bigger and bigger piece of the pie offsetting the slower growing developed world in the Buy business.

It should be noted that the slowdown at Nielsen does not seem to be a competitive problem in its Buy segment.  In fact, if you do a simple transcript search on Bloomberg (TA is a great function) you will see that Nielsen retail data is the currency for consumer packaged goods companies.  It was referred to by name on conference calls by: Diageo, Brown-Forman, Church & Dwight, Monster Beverage, General Mills, Molson Coors, Post, Coca-Cola, Kimberly-Clark, etc.

There must me more going on here, what else are people worried about?

Another major worry people seem to have, is will Nielsen thrive in a changing media landscape?  It is not news to anyone that people are changing the way they watch TV. While they used to watch things on the network linearly, now people time shift with DVRs and watch things “on demand” through over the top services like Netflix and Amazon Video.  Isn’t Nielsen a dinosaur in this age of changing media consumption? I first looked at Nielsen five years ago and had the same worries. Would they adapt to the changing landscape?

My Variant View

I believe Nielsen has successfully (if slowly) navigated the transition to a new digital video world.   After speaking with Nielsen panelists I know that Nielsen now measures anything that plays on a TV including Netflix and Amazon Video among others. I also know that Nielsen has software that will measure what people watch on smartphones, laptops, etc.  So I think Nielsen has the capability to measure video no matter when or where it is being watched. However, in speaking with employees, I also discovered that Nielsen moves cautiously. An example of this is that 140 TV markets still use diaries with people writing down what they watched (instead of automated systems) and they are going to change over in the next month or so.  Margins should continue to benefit from this transition and more and more of the data collection is automated. In addition I think some tuck-in technology Nielsen has bought (like Gracenote in early 2017) will open up new opportunities for them. An example of this is the recent announcement by CBS that they will leverage Nielsen technology to serve up targeted ads on smart TVs. (See: http://deadline.com/2018/05/cbs-and-nielsen-live-dynamic-ad-insertion-1202390625/) Competitively speaking, Nielsen remains the industry gold standard.  comScore appears to still be in disarray after an accounting investigation has weighed on its business for years.  When you are supposed to be in the business of providing trusted third party data an accounting problem is not good for your reputation.  It is true some customers wish Nielsen would move faster (see http://adage.com/article/special-report-tv-upfront/nbc-universal-solve-tv-measurement-issues-metric/312997/), particularly because their linear ratings have plummeted as people watch in different ways and Nielsen measurement gets better in ways that aren’t flattering their numbers (like moving from diaries to automated where people think they watched a whole show on the diary, but actually didn’t).

Risks

Nielsen was a private equity company.  It carries more debt than I would prefer ($8.2 billion in net debt) on ~$2.0 billion in EBITDA.  However, Nielsen’s business has high visibility at the beginning of each year (70% of revenues pre contracted).  Furthermore, during the great recession this business actually grew, so it is definitely somewhat recession resistant.

The Buy business could take longer to come around than I think.  Anything is possible, but after several years of CPG cost cutting and with a big ramp coming from Walmart, I think the turnaround is coming by Q4.  

Amazon doesn’t provide Buy data to Nielsen (but, interestingly Whole Foods does).  As Amazon takes share in retail Nielsen’s data coverage erodes a little. Amazon is, interestingly, a Nielsen customer on the TV side though and works with them to track viewers on Twitch (the streaming video game network).

There are definitely big competitors in online audience measurement.  In addition to comScore you have Oracale’s Moat, Google Analytics, Adobe Online, and many others.  Still others have tried and failed to unseat Nielsen as technology has changed with respect to video.  See the case of Symphony Ratings as a cautionary tale (https://decider.com/2017/04/17/symphony-advanced-media-netflix-ratings/).  If anything, transitioning from a dominant role in video to a broader role in measuring Internet content consumption may be as much opportunity as threat.  See for example the eSports measurement business which Nielsen has been going after (https://esportsobserver.com/activision-blizzard-nielsen/).

Nilesen’s “slow and steady” deliberate approach to innovation has served them well so far, but there is always the chance that a rapid technology change catches them off guard.  I never expect Nielsen to be a first-mover, it doesn’t seem to be in the company’s DNA based on the diligence I have done. I wish they innovated faster and hope that they don’t get outflanked one day due to their approach.

Valuation

2018E 2019E

P/E GAAP 20.7x 16.8x

P/E Adjusted*       16.4x 13.9x  

*excludes amort of intangibles, but includes special charges which appear recurring & stock options

EV/EBITDA 9.47x 8.74x

P/FCF 13.9x 11.1x

Current Dividend Yield: 4.3%

Nielsen isn’t dirt cheap, but it seems fairly cheap for a very high quality business with a big moat.

Since it has (most recently) been public in 2011 these are the cheapest multiples we have seen on almost every metric.

Holders

Nielsen is in the S&P 500 so many of its top investors are passive.  There are however some notable value investors. Glenn Greenburg’s Brave Warrior just took a position recently according to his 13F.

Capital Group 10.4%

Vanguard 10.1%

Blackrock 8.0%

GIC Private Limited (Singapore Sovereign Wealth Fund) 4.7%

Brown Brothers Harriman  4.2%

State Street 3.9%

Tesuji Partners 3.4%

Barrow Hanley Mewhinney & Straus 2.9%

Fidelity 2.6%

CI Investments 2.3%

Brave Warrior 2.0%

Insiders own ~1.8 million shares among them. Collectively its meaningful, but this defintely isn't a company run by an owner/operator.

Catalyst

• Buy business turns the corner in 2H of 2018
• Continued momentum in Watch (with a potential boost from esports and sports gambling advertisers entering the market soon)