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Meredith Corporation (MDP - Analyst Report) recently posted better-than-expected second-quarter 2012 results on the back of healthy demand for non-political advertising at its Local Media groups, increased readership and online traffic, and effective cost management.

The quarterly earnings of 70 cents per share moved past the Zacks Consensus Estimate of 67 cents, but fell 21.3% from 89 cents earned in the prior-year quarter. On a reported basis, earnings slipped 20.5% year-over-year.

Management now expects earnings in the range of 65 cents to 70 cents for the third quarter and between $2.55 and $2.75 per share for fiscal 2012. The current Zacks Consensus Estimates for the third quarter and fiscal 2012 are 68 cents and $2.64, respectively, that dovetails with the company’s guidance range.

Total revenue for the quarter dropped 10.2% year over year to $328.7 million, reflecting a decline of 14.1% in advertising revenue to $183.6 million and a fall of 8.2% in other revenue to $81.2 million, partially offset by a marginal growth of 0.3% in circulation revenue to $63.9 million. Total revenue also fell short of the Zacks Consensus Estimate of $343 million.

Operating expenses for the quarter dipped 7.3%, attributable to a 6.4% decline in production, distribution and editorial costs and a 9.1% fall in SG&A expenses, partially offset by 8.7% rise in depreciation and amortization.

Segment Details

Meredith’s National Media Group revenue tumbled 9% to $244.3 million, attributable to a 12.4% decline in advertising revenue and 11.1% fall in other revenue, partially offset by 0.3% rise in circulation revenue. Weighted average net advertising revenue per magazine page climbed approximately 8%. Meredith now projects National Media Group advertising revenue to be flat to up in the low-single digit range in the third quarter. 

Segment EBITDA decreased 13% to $39.6 million with EBITDA margin contracting 80 basis points to 16.2%.

Advertising revenue related to food and consumer packaged goods remained weak due to higher commodity prices. Also, insufficient launch of pharmaceutical drugs in the marketplace deterred the advertising revenue in the pharmaceutical categories.  On the contrary, the company registered double-digit advertising revenue growth for the second-consecutive quarter in categories including home, non-prescription drug and financial services. Management hinted at witnessing improving trends in food related advertising in the early parts of 2012 calendar year.

The marginal increase in circulation revenue was due to a gain in subscription revenue. Further, management stated that online orders for the subscription of print magazine rose twofold to over 500,000 aided by aggressive online and email marketing initiatives.

Meredith’s Local Media Group revenue declined 13.4% to $84.4 million. Non-political advertising revenue increased 8.7% to $75.4 million, reflecting a ninth successive quarter of year-over-year enhancement. Political advertising revenue dropped sharply to $1.1 million from $22 million in the year-ago quarter. Other revenue jumped 31.4% to $7.9 million. Automotive advertising revenue climbed 15%, whereas digital advertising revenue surged over 50%. Professional services revenue increased 19%. Management hinted that non-political advertising revenue is pacing up in the mid single-digit range in the third quarter of 2012.

EBITDA at Local Media Group was $33.3 million, down 24.9% from the prior-year quarter, whereas EBITDA margin contracted 600 basis points to 39.5%.

Meredith’s Growth Catalysts

It's been a constant endeavor of Meredith to explore and add alternative revenue generating channels through acquisitions or by entering into strategic alliances. Thereby, the company attempted to reduce its dependence on conventional advertising.

The sluggish economy prompted Meredith to diversify and add significant revenue streams beyond traditional advertising by leveraging its brands through strategic alliances. Brand Licensing revenue supplemented the sales of the company, led by a rise in sales of Better Homes and Gardens' branded products at Wal-Mart Stores Inc. (WMT - Analyst Report). The company extended its contract with Wal-Mart Stores through 2016, which includes an expansion of the Better Homes and Gardens branded home decor and garden program at Wal-Mart stores across the United States and Canada.

Martha Stewart Living Omnimedia Inc. (MSO - Snapshot Report), one of the competitors of Meredith, is also not far behind in terms of strategic alliances to boost growth. In a calculated move, the company sold its 16.6% stake to J. C. Penney Company Inc. (JCP - Analyst Report) last December.

The tie up between the two calls for a ‘store-within-a store’ concept. This means that if you are in search for an extensive range of home and lifestyle merchandise designed by Martha Stewart, you can even visit a nearby J. C. Penney shop.

However, recently Macy’s Inc. (M - Analyst Report) filed a lawsuit against Martha accusing the latter for the breach of contract. Since 2007, Macy’s has been selling an exclusive line of products by Martha Stewart under a five-year deal. 

Coming back to Meredith, it remains committed to make strategic investments to increase its revenue generating capabilities and enhance its profitability. The company is aggressively expanding its brands through online platforms, televisions, videos and is expanding its reach of food and lifestyle content across tablet products, such as the iPad, NOOK Color, Kindle Fire, and Samsung Galaxy.

Following its growth trajectory, Meredith acquired “Every Day with Rachael Ray” the award-winning magazine of Reader's Digest Association, and assets of “FamilyFun: magazine from Disney Publishing Worldwide.Moreover, the company had also acquired EatingWell Media Group and launched Recipe.com in June 2011. Monthly average unique visitors to theRecipe.com website reached approximately 2 million in the first six months of its operation.  

Most recently, Meredith, the media and publishing company, entered into a deal with Reader's Digest Association to acquire the world's No. 1 digital food site, “Allrecipes.com” for about $175 million, to expand its digital platform. The buyout would double Meredith Women’s Network’s consumer reach and revenue, while offering advertisers a broad consumer base of 100 million.

However, the transaction will hurt Meredith's fiscal 2012 results by about 10 cents a share, but it will be modestly incremental to its earnings per share and free cash flow in fiscal 2013. “Allrecipes.com” has 17 sites in 22 countries, and has database of more than 500,000 recipes.

According to the data collected from Mediamark Research and Intelligence, readership of Meredith magazines rose to a record of 113 million. Monthly average unique visitors to the National Media Group websites increased substantially. Monthly unique visitors and page views both climbed 50% to 20 million and 450 million, respectively. Management hinted that the acquisition of Allrecipes.com will result in twofold rise in monthly unique visitors to 40 million at the Meredith Women's Network.

Other Financial Details

Meredith ended the quarter with cash and cash equivalents of $26.1 million, total long-term debt of $250 million and shareholders’ equity of $793.1 million. During last twelve months ending December 31, 2011, the company generated net cash flows from operating activities of $200 million and repurchased 1.2 million shares. The company’s leverage ratio (debt to EBITDA) was 1 to 1.

Meredith, in its attempt to optimize its shareholders’ return, increased the quarterly dividend and also approved a share buyback program in the first quarter of 2012. The company hiked its annual dividend by approximately 50% to $1.53 from $1.02. Additionally, the company declared a $100 million share repurchase program. These strategies enhance shareholders’ return and boost the market value of the stock.

Currently, Meredith retains a Zacks #2 Rank that translates into a short-term ‘Buy’ rating. Moreover, considering the company’s fundamentals, we have a long-term 'Neutral' recommendation on the stock.

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