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Is It Time to Buy Time?

Source: Time Inc

Following its spin-off from its parent, Time  (NYSE: TIME  ) , the largest magazine publisher in the U.S., began trading as an independent entity this month. Notwithstanding all of the negativity and pessimism surrounding print media companies, it's generally unwise to paint all stocks in the same industry with the same brush without considering their individual characteristics.

For one, Time, as a magazine publisher, is relatively more attractive than newspaper publishers in general, for reasons discussed below. In addition, Time also shares characteristics of fellow media companies Disney (NYSE: DIS  ) and A. H. Belo (NYSE: AHC  ) that offer insights into its hidden potential.

Magazines versus newspapers
While most people don't see the difference between magazines and newspapers, magazines have larger and more engaged audiences. According to research by The Association of Magazine Media, magazines grab the attention of more affluent consumers, and magazine readers are more likely to recommend products and services to others.

An estimate found that 67% of high net-worth magazine readers with annual incomes exceeding $100,000 showed some interest or considerable interest in advertising they had seen or heard in the past 30 days, compared to 61% of newspaper readers in the same income bracket. In addition, magazine readers were more likely to influence their friends or family to make purchases across the vacation travel, health care, automotive, finance, technology, and food categories in comparison with newspaper readers.

Given magazines' superiority in capturing consumer attention and influencing purchasing decisions, Time is more attractive than its newspaper peers purely from a product and industry standpoint.

Also, Time stands out among its magazine publisher peers. Its titles are among the top two in advertising revenue share in 15 of the 18 categories in which it competes. In addition, it seems like 'the strong get stronger' in the magazine industry. Between 2009 and 2013, the percentage of advertising revenue collected by the four largest publishers increased from 64% to 68%, while Time's market share grew from 20% to 23.7% over the same period.

Leveraging intellectual property
In addition to licensing more than 50 print and digital editions of its magazines in over 30 countries, Time has also extended its brands beyond its bread & butter print and digital magazines.

Source: Time Inc

One example is direct sales or licensing agreements related to consumer products and services. Time's lifestyle magazine InStyle collaborated with footwear brand Nine West to introduce its first shoe collection in August 2013. This brand licensing opportunity arose because of InStyle's brand strength.

Started in 1994, InStyle reaches out to an audience base of close to 10 million per month and is known for its ability to influence sales with its readers, who buy eight advertised items per issue on average. Going forward, InStyle could possibly capitalize on InStyle's brand name to earn more money from product sales, e-commerce, and events.

With respect to leveraging intellectual property, Disney is one company that always comes to mind. Before brand extension became a buzzword, Disney had already started to print Mickey Mouse's image on all sorts of licensed merchandise from T-shirts to watches.

Following the success of Frozen, the first animated film in history to cross the $1 billion global box-office sales mark, Disney has started to ring in the cash registers. Apart from the usual sale of follow-on merchandise, Frozen will also become an ice-dancing spectacular in the mold of the Disney on Ice Show. Furthermore, the Boston Globe reported that Disney store shelves were running out of Frozen merchandise across the nation, and Disney theme parks were packed with visitors queuing up to take photos with the princesses from Frozen.

As an indication of the potential of Time's growing 'other businesses' (no segment break-down in filings), Disney's consumer products segment is its most profitable division with an operating margin of 31%, compared to 16% and 11% for its theme parks and studio entertainment businesses, respectively.

Capital allocation
Media companies tend to generate cash, so capital allocation policy is a key investment consideration. Time has mentioned that it will maintain a balanced capital allocation policy among reinvestment, M&A, capital return, and debt repayment. It's reassuring that Time has also allocated a dividend payout of close to 30% of its free cash flow, according to a recent Citi Research report.

Given that Time is currently within its long-term leverage target of between 2.0 and 2.5 times with minimal maintenance capital expenditures (below $50 million annually) required, it should have sufficient free cash flow to fund dividends.

Investors can witness the positive impact of good capital allocation practices at A. H. Belo, which owns and runs three metropolitan daily newspapers. Its share price outperformed the market and print media stocks in general with a 72% increase in the past 52 weeks.

A. H. Belo's capital allocation policy has contributed to this. Firstly, the company has indicated that it will maintain a healthy cash balance and proceed cautiously with respect to M&A activities. Secondly, A.H. Belo's dividend payout and track record are decent. It sports a 2.7% forward dividend yield and has consistently paid dividends for the past four years.

Foolish final thoughts
Investors should not avoid all print media stocks. Time differentiates itself from its peers with its portfolio of leading magazine brands and its ability to extend these brands to leverage other profit opportunities. In addition, its capital allocation practices should give investors confidence that it will return excess cash to shareholders.

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Mark Lin

Mark is a private value investor and is the author of website which uses a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders.

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