Description

Business Overview

Time Inc. (TIME) is a ‘pure play’ magazine company that began stand-alone operations after its June 2014 tax-free separation from Time Warner (TWX).  It is a ~$1.5bn market cap stock with 25% of its market cap in cash and an enterprise value of ~$2.4bn. 

TIME makes money primarily in two ways: 1) magazine circulation, which charges readers for delivery subscriptions and newsstand purchases, and 2) advertising, from hosting advertisements on its various magazines and digital properties.  It has a renowned portfolio of magazine titles that everyone would recognize including: Entertainment, Fortune, People, Sports Illustrated, Money, Travel & Leisure, and of course, Time.  The company is also the market leader (#1 in print audience, #1 in online audience, #1 print ad share) among the three other major magazine publishers Conde Nast, Hearst, and Meredith, taking ~25 cents of every ad dollar spent in the magazine channel.  The business today generates ~$3.2bn of total revenue (~85% in the US) which is split ~55% advertising, ~35% circulation, and ~10% other (marketing services, licensing, and events), and it is expected to convert ~14.5% of this revenue into Adj. EBITDA implying ~$465mm at the mid-point of management’s guidance.

Thesis

The consensus paradigm for TIME is that it is a quintessential ‘secular loser’ that ultimately has little going-concern future as print magazines remain in steady decline.  However, most of these dynamics are well understood and in the stock price, and TIME is finally interesting today for several reasons: 1) valuation is now at anemic levels after fighting difficult industry trends the last couple of years (~4.75x ’17 EBITDA and a ~20% ’17 FCF yield), 2) the business is finally inflecting to positive revenue growth this year after 5 years of declines and transforming into a ‘new’ media company, 3) consolidation in the industry is probable and there is the likelihood of a transformative transaction involving TIME, 4) the high quality post-spin management team led by CEO Joe Ripp is newly incentivized as of this February with an equity compensation plan that pays management to hit a 2-year stock price target of $26 by 2018 (~70% upside from today’s price).

Asymmetric Scenarios

Back in February, management laid out full year guidance of +1 to +5% top line growth for full year 2016 and an EBITDA range of $440-490mm.  After the positive Q1 report this past week, management excitedly reaffirmed these numbers insinuating the mid/upper end of the range is achievable.  Further, they reiterated their call that the business will be generating $300mm of FCF in 2017. 

A reasonable set of outcomes calls for a base case of a $22 stock price (40%+ upside) by early 2017 assuming $475mm of EBITDA (upper end of range) at 6.0x (lower end of media peers).  If management goes on to generate the $300mm of FCF in 2017 that they currently expect, the bull case would be a $27 stock price (75%+ upside) in 18 months at 6.0x implied 2017 EBITDA.  Further, if it turns out Meredith makes a bid for TIME in the back half of the year, the M&A scenario could shake out at a $30 stock price (95%+ upside) which represents 8.0x EBITDA or 5.0x PF Adj. EBITDA when accounting for synergies.  On the downside, if the negative print trends accelerate faster than expected and management misses the low end of the range, generating only $425mm of EBITDA this year, the bear case would be a $12.5 stock price (20% downside) representing 4.5x EBITDA.  In summary, the stock today provides an attractive risk/reward with limited downside compared to an achievable base case of 40%+ upside and a greater than 3:1 risk/reward if management hits their target in 2017 or the company gets acquired.  Finally, if management is unsuccessful in achieving their operating targets and the stock sells off, the likelihood of a sales process goes up dramatically which should create a floor and would ultimately bailout investors from these levels.   

Trough Valuation

Time Warner spun TIME on the back of 3+ years of declining revenues and as these trends continued, holders of the parent Time Warner had no appetite to hold the SpinCo which was both unattractive fundamentally and largely uninvestable from a size and liquidity standpoint.  It came out trading around ~8x EBITDA and has subsequently de-rated to under 5.0x over the last two years.  The rationale for this move made sense as top line consistently eroded by low-to-mid single digits, and given all the operating leverage of the business, EBITDA margins followed suit dropping from ~20% in 2010 to ~14.5% today.  The theory back then was that there was no compelling reason to own a secularly declining asset that was trading in-line with healthier peers while competing ineffectively for advertising dollars.  But today, revenue is inflecting positive this year and with the business stabilizing, valuation metrics across the board provide sufficient downside protection (~4.75x ’17 EBITDA, ~20% ’17 FCF yield, ~5% dividend yield) vs peers that trade in the 7-9x EBITDA range.

Business Inflection

We are now coming out on the other side of the tunnel with revenue finally set to increase for the first time in five years this year.  Trapped in the shadows of the Time Warner conglomerate, these magazine assets had been neglected and undermanaged, and now they can finally be optimized for the new digital opportunities. 

First, they are bolstering circulation by ensuring that their content is both accessible and a great user experience when consumed on a digital device.  The company is participating in a mobile app called Texture that is essentially the Netflix of magazines and will ensure the continued distribution as print circulation declines.  Additionally, they will monetize their digital properties more effectively going forward with their recent acquisition of Viant. Viant is enabling advertisers to programmatically target specific users of TIME content across devices and ‘close the loop’, offering a higher value ad impression compared to generic display or physical pages in a magazine.  So instead of simply losing the advertising business altogether to other digital assets with targeting capabilities like Facebook, TIME is now able to offer a competitive product and reinvigorate impressions and CPM. 

Second, TIME is simultaneously repurposing their massive library of content to create both short and long-form video products which is an entire new white space opportunity.  To this end, management announced on the recent earnings call that they are launching a “People” and “Entertainment Weekly” OTT video channel. 

Quoting the CEO Joe Ripp, “There's a new land grab going on and it's in digital video, over-the-top video and Time Inc. is going to be a major player in that space.”  These old fashioned print magazines are finally transforming into high-tech, quality digital assets as well as simultaneously morphing into video channels.

Consolidation

Besides the trough valuation and business inflection/transformation, the third piece of the thesis is the potential for consolidation in the space.  Prior to being spun-out in June 2014, Time Warner almost nearly sold Time Inc. to Meredith outright.  While that deal broke down and Time Warner ultimately decided a spin-off was the most efficient way to monetize the TIME business, a transformative transaction this year is actually quite likely.  As it turns out, Meredith was itself almost acquired toward the end of 2015 by Media General, a broadcast television company.  However, prior to that deal closing in early 2016, Nexstar Broadcasting put in a bid to acquire Media General and Media General accepted, asking Meredith to agree to terminate their originally proposed merger.  Basically what this means is that Meredith is still ‘single’ and looking to ‘mingle’.  Moreover, TIME is now approaching its two-year spin anniversary next month in June which will allow it to be acquired without tax consequences.  But just because Meredith wanted to buy TIME two years ago and they are both free to do a deal today, why does a deal make sense?  At 9.0x EBITDA, Meredith trades at nearly twice the multiple as TIME and could easily make an accretive offer.  But more importantly, TIME will generate ~$465mm of EBITDA compared to ~$1.5bn in SG&A.  Any reasonable amount of assumed synergies from SG&A reduction in a combination could increase TIME’s pro forma EBITDA by 50%+.

Catalysts

With the Q1 earnings release having just taken place this past week, the next major catalyst will be the investor day the company is hosting in two weeks on May 17^th.  Outside of the Q2 earnings call in August, there may be updates on the launch of some of the recently announced digital opportunities like the OTT video channel.  Finally, the two-year anniversary of the spin is mid June which leaves the whole back half of the year open to potential combination rumors.

Risks

The obvious risk is that management’s execution on the digital opportunities does not sufficiently offset the declines in the traditional print business.  It is possible that what has been a relatively predictable decline in print magazine circulation thus far could unexpectedly and meaningfully inflect lower over the next couple of years.  Inorganic growth is accounting for a healthy portion of the revenue ‘cross over’ this year so investors will likely continue to be skeptical on how well these digital integrations can translate into meaningful organic opportunities going forward.  The business is subject to advertising trends which could be negatively impacted by a general economic slowdown or further weakness in industries like travel that have been affected by geopolitics and epidemics like the Zika virus.  Moreover, the competition for advertising dollars is increasing as barriers to entry for new digital media publishers are significantly lower than existed in the print world.  Nonetheless, TIME is the leader of its industry, it is a collection of incredible content and renowned brands with global reach that is growing, it is trading at a price that incorporates the majority of the widely understood secular issues, and management has laid out a plan to better monetize the stable of high quality media assets while transforming the business to better compete in the new digital landscape.  

Catalyst

Catalysts

With the Q1 earnings release having just taken place this past week, the next major catalyst will be the investor day the company is hosting in two weeks on May 17^th.  Outside of the Q2 earnings call in August, there may be updates on the launch of some of the recently announced digital opportunities like the OTT video channel.  Finally, the two-year anniversary of the spin is mid June which leaves the whole back half of the year open to potential combination rumors.