Magazine Publishing Still Has Issues

Magazine publishers are facing some of the same issues plaguing the newspaper business. Consumers are migrating online for content, and advertisers are shifting ad budgets away from print.

The news-driven magazines have been among the hardest hit, which makes sense given the immediacy of content available on the Internet.  McGraw-Hill (MHP), sold its BusinessWeek unit to Bloomberg last year for a minimal dollar amount and the assumption of liabilities, as the weekly magazine had suffered operating losses for several years.

Recently,  Washington Post Company  (WPO) announced that it was looking to sell its storied Newsweek brand. As CEO Don Graham stated, "the losses in 2007-2009 are a matter of record. Despite heroic efforts on the part of Newsweek's management and staff, we expect it to still lose money in 2010. We are exploring all options to fix that problem."

As illustrated in the above table, the news-driven magazines have fared the worst. One interesting exception is the celebrity news category as advertising at US Weekly and People held up much better. Better Homes and Gardens is a classic lifestyle magazine aimed at women (median age of 49) whose evergreen content is still well-received by subscribers. We think this illustrates that some titles will remain resilient despite the headwinds facing the overall industry.

The U.S. magazine industry is fairly diversified, with Time Inc, a unit of  Time Warner , having the largest U.S. market share, around 20%. Private companies Conde Nast, Rochdale, and publicly traded  Meredith Corp. , each have market shares ranging between 10-13%. Several of these publishers have formed a consortium called Next Issue Media, to jointly work on an electronic delivery business model for e-readers like the Kindle and iPad. The publishers want to make it easy for consumers to browse and buy content on the device of their choice, and plan to work with  Amazon (AMZN),  Apple (AAPL), and other device manufacturers. However, we believe a significant challenge for the consortium will be retaining control of the customer relationship, as Amazon and Apple both have closed systems that control distribution.

Following a rough 2008 and 2009, we expect the magazine industry to benefit from the overall advertising recovery in 2010.  However, we're expecting gradual advertising declines for the industry subsequent to 2010. Traditional print ads are in decline, and magazine publishing on the Internet has not been a profitable venture. Over time, we expect more unprofitable magazines to fold, but we think stronger titles should garner a larger share of a shrinking advertising pie.

The magazine publishing business constitutes a small portion of our overall media coverage list, with Meredith and Time Warner as the two companies with exposure to the magazine business. Relative to other magazine publishers, we believe Meredith is well-positioned, as its major titles like Better Homes and Gardens and Family Circle, are aimed at a loyal demographic that are more likely to keep their subscriptions. Meredith's core business is magazine publishing, with less exposure to local television broadcasting and integrated marketing services. We currently think shares are slightly overvalued, with a price/fair value ratio of 1.09.

Time Warner owns the largest magazine publisher, Time, Inc., but it contributes a small percentage of its overall cash flow compared to the much larger cable networks and filmed entertainment segments within the media conglomerate. We think Time Warner shares are slightly undervalued, with a price/fair value ratio of 0.96.