Shares of magazine publisher Meredith Corporation (MDP) are flying off the shelves this morning -- up 14.8% as of 11:45 a.m. EST.
The publisher of such famed titles as People, Better Homes & Gardens, and Southern Living announced this morning that although its fiscal second-quarter 2020 pro-forma earnings from continuing operations were only $1.14 per share (Wall Street was looking for $1.67), sales came in ahead of expectations at $811 million (versus the Street consensus of $797.9 million).
Ordinarily, numbers like these are what investing professionals would call "mixed" -- an earnings miss but a revenue beat. And yet, investors seem to be hailing Meredith's results as an unqualified success. Does that make sense?
Let's consider. The sales beat wasn't as great as it looked at first glance. A year ago, Meredith's sales were $878 million for fiscal Q2 2019; now they're just $811. That's a 7.6% decline in revenue.
And the earnings? As bad as they look initially, they're even worse when examined more closely. Earnings from continuing operations excluding special items (i.e., pro forma earnings) declined 26.5% year over year. Earnings from continuing operations as calculated according to generally accepted accounting principles (GAAP) were even worse, plummeting 37.7% to just $0.91 per share.
On the other hand, net profits on the bottom line were $0.40 per share, which is a big improvement from Meredith's net loss of $0.01 per share a year ago.
All of this, I have to say, is very confusing. Depending on which numbers you focus on, Meredith's quarter was either bad, worse, or pretty darn impressive!
It seems to me that what investors are doing today is accentuating the positive and ignoring the negative, potentially to their peril. With Meredith stock now trading for north of 28 times earnings, and carrying such a large debt load (roughly twice its market cap) as to push its debt-adjusted P/E ratio up closer to 88 times, Meredith is such an expensive stock that nothing less than an unqualified blowout quarter could justify today's explosion in stock price.
Meredith's success was not unqualified, however. Neither is today's rally justified.