Time Inc. Stock Drops in Market Debut After Time Warner Spinoff

Time Warner CEO Jeff Bewkes

UPDATED: Shares of the largest U.S. magazine publisher fall as Wall Street continues to debate its outlook and the stock of the Hollywood conglomerate.

Time Inc., the largest U.S. magazine company, started trading as a separate stock Monday after its spinoff from entertainment conglomerate Time Warner as Wall Street continued to discuss its future outlook.

The stock, trading under ticker symbol TIME, closed down 1 percent at $23.30 on Monday, valuing the company, home of Time, Fortune, People, Entertainment Weekly and Real Simple, at more than $2.5 billion, according to Bloomberg.

Meanwhile, Time Warner's stock was up 1 percent on Monday to $68.99.

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Time Warner first announced the plan to make Time Inc., formed in 1922 by Henry Luce and Briton Hadden, a separately traded company in March 2013. The spinoff is the latest step in Time Warner CEO Jeff Bewkes' strategy to focus the entertainment conglomerate on its core film and TV businesses, such as the Turner networks, HBO and Warner Bros. Under his leadership, TW previously also spun off AOL and Time Warner Cable in 2009. 

"The spinoff of Time Inc. completes the process we began several years ago to position Time Warner as the world's leading video content company," Bewkes said Monday. "Our strategy reflects our commitment to delivering strong returns to our shareholders as we light up the world with the best storytelling. The spinoff gives Time Warner even more focus as we continue to deliver on this strategy."

Time Inc. has been a drag on Time Warner's financials amid declining revenue and profitability. Time Inc.'s 2013 revenue of $3.35 billion was down 2.4 percent, with Time Warner's total excluding the magazine unit up 4.5 percent. Similarly, Time Inc.'s adjusted operating profit fell 12.7 percent last year to $404 million. TW without Time Inc. brought in a 9.3 percent gain to $6.2 billion. 

But Time Warner top executives have also said that Time Inc. on its own could focus on initiatives that Time Warner wouldn't have concentrated on in the past. 

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Time Inc., now the only stock market-listed company in the U.S. purely focused on magazines, is led by chairman and CEO Joe Ripp, who has not outlined a detailed vision for the company. But he has started cutting costs, focusing on building digital revenue, particularly from online video, and making small acquisitions.

Industry observers have reservations about Time Inc. stock, given the challenges of print media, but some see an upside.

Wells Fargo analyst Eric Katz on Monday initiated coverage of Time Inc. shares with an "outperform" rating, similar to a "buy." He has a $27-$29 price target range on the stock. 

Katz cited six factors for his bullishness. "Our positive bias is based on first, strong, new management with significant turnaround experience. We think the new team comes with a fresh outlook and more independence from Time Warner, which is likely to yield better execution."

Second, he said that the "bulk of restructuring" was already behind the company, "but plenty of cost cutting remains." Third, management's new digital strategy should help stabilize revenue trends as digital revenue has been growing in the mid-teen percentage range, with management investing to accelerate growth. 

Katz also cited solid free cash flow generation, the lack of "transformative M&A" in the near term and a "compelling" stock valuation as key drivers of his optimism. 

Dealmaking "could be a future catalyst," he argued. "As restructuring progresses, Time could resume discussions" after Time Warner previously failed to seal a sale to Meredith Corp. 

In terms of stock upside, Katz said that Time Inc.'s stock implies a 13 percent drop in operating income before depreciation and amortization, compared with his 6 percent forecast. "Even on conservative estimates, Time trades at a discount" to peers, he concluded. 

Morgan Stanley analyst Benjamin Swinburne, meanwhile, has a $23-$25 stock price range on Time Inc.'s stock. He initiated his stock coverage with an "equal weight" rating on Monday in a report entitled "Waiting for the Right Time." 

"Time Inc. is the leading magazine publisher in the U.S. and U.K. and will be a pure-play magazine publishing asset," he wrote previously. "We expect strong free cash flow conversion rates to continue, supported by low capital expenditure requirements and stabilizing operating trends."

On Monday, he said he would remain in a wait-and-see position "until we see evidence of greater industry revenue stability and higher visibility into Time's capital allocation."

Cost cutting is expected to remain a key focus for Ripp. Among other things, the company has already announced that it will late next year leave its longtime home, the Time & Life Building in midtown Manhattan, to move to cheaper premises in downtown Manhattan.

Ripp has also emphasized Time Inc.'s need for a more aggressive online video strategy. The firm's new video hub, The Daily Cut, will bring in content from various brands, including People entertainment show People Now and Fortune's The Chat.

Dealmaking could be on the agenda, but unlikely in the form of big acquisitions. Time Inc. was spun off with $1.3 billion in debt. Analysts have compared that with the lack of debt that Rupert Murdoch’s News Corp got when the mogul's empire was split into two last year. Moody’s recently rated Time Inc.'s debt below investment grade, but other observers said the debt will also allow Time Inc. to show that it can be trusted financially.

Many analysts say that Ripp could sell some magazines and buildings to strengthen the company's financials. Tuck-in acquisitions that allow the company to extend its reach in key niches could also be on the way. Time Inc., for example, recently agreed to buy Cozi, a family organizer app that fits with such magazines as Real Simple.

For Time Warner, the spinoff of Time Inc. will mean the company will report financials without the drag of the print business. 

Bewkes last year argued that the spinoff's benefits would "substantially outweigh" the benefits of Time Inc.'s links to other TW businesses. The separation will make TW "the leading pure-play video content company" with the largest TV networks group, biggest TV production business and largest film, he said. "We think that's a very good place to be."

In the spinoff, Time Warner shareholders receive one share of Time Inc. for every eight shares of Time Warner owned.

Guggenheim Partners analyst Michael Morris on Monday raised his price target on Time Warner's stock by $3 to $75 but maintained his "neutral" rating. 

Other analysts are more bullish, despite recent ratings concerns at some of the Turner cable networks. Sanford C. Bernstein analyst Todd Juenger recently upgraded his TW stock rating to "outperform" in a note entitled "The Best Aspects of Media with the Least Exposure to Advertising." 

He cited two main drivers -- first, a recent extension of management guidance for double-digit TV carriage fee growth through 2018 from 2016, which the analyst said has a "material impact." Second, he said that amid "intensifying market concerns on advertising," TW is least exposed. The Time Inc. spinoff "doesn't hurt," Juenger added.

Email: Georg.Szalai@THR.com
Twitter: @georgszalai