Daily Double
Reader's Digest Association Inc.

Ticker: (NYSE: RDA)
Phone: 714-238-1000
Website: www.readersdigest.com
Price: $31 5/8 (9/15/99)

By Rick Aristotle Munarriz
Thursday, September 14, 1999


How Did it Double?

If DeWitt Wallace, founder of Reader's Digest, would have his way, today's Daily Double would read something like this:

From prolific, to horrific, to terrific, Reader's Digest has discovered addition through subtraction.

The abridged approach doesn't work this time. Reader's Digest's turnaround has volumes worth of subsidiary shedding, marketing tweaking, and attitude adjusting. Running short would be selling the company short. And, given the recent rise in its share price, one can see where selling the company short would have been painful at best.

The irony here, and most fans of Reader's Digest probably appreciate some form of irony, is that this revival has taken place at a time when sales have been falling. Earnings tripled this past quarter on falling revenues. The trend of declining sales accompanied by higher income is expected to continue throughout this new fiscal year. Well done, Wallace would claim. Well? Done!

Business Description

Reader's Digest was founded by Wallace in 1922. The editors would scour countless publications, find the best stuff out there, and summarize it for readers on the go.

Today the company's extensive product lines reach 100 million readers monthly. Beyond the namesake magazine, which is published in 19 different languages, the company offers condensed books as well as do-it-yourself guides for topics like home improvement, cooking, and gardening. Some of Reader's Digest's other magazines include Walking, American Health for Women, and Moneywise.

Beyond print, the company also features music collections and videos.

Financial Facts

Income Statement*
12-month sales: $2532.2 million
12-month income: $104.5 million
12-month EPS: $0.96
Profit Margin: 4.1%
Market Cap: $3399.7 million (on 107.5 million shares)
(*Adjusted to exclude non-recurring items)

Balance Sheet(as of March 1999)
Cash: $370.2 million
Current Assets: $1190.8 million
Current Liabilities: $992.6 million
Long-term Debt: N/A

Price-to-earnings: 32.9
Price-to-sales: 1.3


How Could You Have Found This Double?

What separates the turnarounds from the turnovers? Overhauling operations is not an exact science. Reader's Digest was off to a good start, though. The company sold its poorest-performing subsidiaries and slashed its once generous dividend. The end result of both actions is more cash to hoard away.

When finding a buyer wasn't feasible, as in the case of some direct mailings that had not proven to be cost effective, the company simply did away with the product line altogether.

Obviously revenues would suffer. Would the company? Investors knew better. As every passing quarter found the literary powerhouse growing margins on a lower base of sales, earnings exploded.

Reader's Digest was doing what its flagship publication was all about. Condense. Trim away the fat. Give the people the best and nothing but the best.

Where to From Here?

Reader's Digest is still far from the Wall Street darling it was four years ago. Back then, the company reported $2.35 per share in earnings on $3.1 billion in sales. The stock, too, was trading higher, peaking past $50 per share.

The company that CEO Tom Ryder is rebuilding today is not the same company of 1995, however. Last month, the company announced a $380 million acquisition of Books Are Fun. The new appendage sells books and other gift and media items at fairs and school events. The deal will be accretive to earnings since Reader's Digest is picking up the company for just 10 times operating income.

The purchase might eventually plug the sales leak, but earnings are still expected to continue higher. Analysts are projecting a profit of $1.44 per share this year and $1.83 next year for Ryder's company.

As the company continues to diversify from its direct marketing roots (including a stake in online health community WebMD), it remains committed to cutting costs and growing the bottom line. Wallace would be proud. Well? Done!

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