I enjoy investing in new companies, which I find by digging through the clutter. It’s an act of bravado to put your money in something you’ve only really read about, you never touched, smelled, probably not even seen. I’m invested in Emerson Radio (MSN) and I’ve never bought a single minidisc from it. You could drive me by its headquarters and I’d be troubled to identify it as Emerson’s headquarters. And yet, I’m one of Emerson’s shareholders, because I read about it, I peruse its financials and I feel I know it financially, just not as a customer.
This time, I’ll get to be a shareholder of a company I use every week. In fact, I’ve been using since I was 19. I remember being 19. Yeah yeah, I don’t like suspense. I’m writing about TIME, the publisher of Time magazine, People, Sports Illustrated, among many others. You know Time. Everyone knows Time. I’ve been getting it every Sunday for the past half dozen years, like a sacred ritual. Quick note: in this article, TIME is the company that spawns from Time to Sports Illustrated and Time is the weekly magazine. I’d go to college and sometimes, when I was really bored with stuff in class, I’d get Time from my backpack and put it like a ninja under the backpack, which was on my table. That way I had a mini fortress beyond which no one could know if I was making a sudoku, writing love letters or even making notes about the class (I wasn’t making notes). And so I read. I read during lunch. I read during practical classes. I read in benches waiting for something or someone. I read in the subway. I liked it, and still do. Now, I get to invest in a company I understand with a great business a brand behind.
So, what happened to TIME? TIME was a subsidiary of Time Warner (TWX) since the 90’s. Last year, Time Warner decided to proceed with a spin-off of its publishing sector into a new listed company, TIME. This a repeatable process, I’ve come to see. Network companies acquire publishing companies, only to divest them years down the road, as the profits start dwindling and the network side of business is much more appealing. Before the spin-off, Time Warner tried unsuccessfully to sell to Meredith (MDP), another publishing company, but the deal didn’t go through. On June 6, 2014, TWX completed the spin-off of its stake in TIME as a dividend of one share of TIME for every 8 shares of Time Warner, not before latching the new company with $1.4 billion in new debt to pay its former parent. TIME being a ~$2B market cap company, that amount of debt is big. So, I’m really not interested in investing in a company which has revenue falling steadily, with a big debt load and in an industry that’s facing huge difficulties. That’s it, done, bye bye TIME, I’ll keep subscribing to your magazine.
Come on! Let’s go another way, the only good way there is. Is debt manageable? TIME has a long-term debt to equity ratio of ~32%. That’s… That’s ok. Above 50%, I’d be twitching uncontrollably. 32%? Humpf, I’ve had more for breakfast.
TIME is currently trading for ~28 times its 2014 earnings. I’d never touch such a red hot stock, let alone a dying one like TIME. And yet, I’m a persistent son of a gun and I had to see what was under the hood of the net income. All very ordinary, except a $190M severance expense. Yes, TIME spent $190M to trim its operations. Screw the euphemism, TIME spent that money to fire people, so that its fixed costs start falling like its revenues.
Assuming that sometime in the near future there’s no one else to fire, then severance costs have to fall to, you know, $0. I’m a cautious guy, so even though I’m sure of that, I’ll still make allowance for a perpetual $60M severance cost diminishing its net income. TIME’s PE for its average last three years net income is 11,5. Not cheap, but way below the initial figure.
Now the really good part. TIME is currently trading for ~6,3 times its FCF. That’s like a yearly return of almost 16%. Man, I’m really starting to like TIME. A cheap company, with a great brand and cutting costs to improve profitability. And I’ve not even written the best part. The insiders are buying the stock.
I haven’t touched much on the business side of TIME. No need, I know revenues are falling and the problems of running a publishing business now. TIME like the others is struggling to migrate its printing readers to digital readers, but that hasn’t caught on. The new management seems excited to me about new growth opportunities, like ecommerce in its fashion magazines. Management has also said it’s open to consolidate, meaning it’s open to buy competitors like Meredith (oh the irony). I’d normally be nervous about this propensity to spend cash, but management seems shareholder oriented to me.
Obviously, we’re working very hard. The first year that Jeff and I were here, we had to focus so much on the spin-off. We’re working very hard with the team and now looking at what are those investment opportunities? We quite frankly been fairly gratified by the number of people wanting to do business with Time Inc. and looking at our brands and the opportunities that they see for our brands. So we are talking to people about partnerships, joint ventures, co-investment opportunities. There’s lots of people with lots of ideas out there. The only thing that surrounds all of that, I can tell you that Jeff and I are incredibly disciplined when it comes to capital allocation. He’s cheaper than I am. And that’s kind of remarkable.Joe Ripp, TIME CEO