Petersen's stock has been hovering in the $19 to $22 range in recent weeks; it closed Nov. 6 at 191/16, down 1/16 from the previous day. On the same day, the Dow Jones industrial average fell 9.33 points.
"It was a relief that the strength of the security offering was borne out" during the market's turmoil, said Chairman-CEO James Dunning Jr.
A GAMBLE, A WINNING HAND
Although many publishing industry observers believed Petersen executives were gambling with their recent initial public offering, so far they hold a winning hand.
Petersen's Oct. 2 IPO sold 7 million shares at $17.50 each, exceeding the estimated $15 to $17 range. The offering came little more than a year after the company was sold by founder Robert Petersen for $462.8 million to equity sponsor Willis Stein & Partners and a management group that includes Mr. Dunning; Claeys Bahrenburg, vice chairman and chairman of the executive committee; Neal Vitale, president and chief operating officer; and Richard Willis, exec VP-chief financial officer.
Analysts say the company is now valued at $632 million to $688 million. Including debt, the value rises to as high as $880 million, nearly double last year's sale price.
Prior to the offering, critics said the buyers of Petersen paid too much for the company, and said management was lucky to see paper costs drop right after the purchase. The company's debt was seen as burdensome, given that the sale price was more than 20 times cash flow and almost 21/2 times revenues.
Industry observers estimated yearly interest payments at $36 million, when Petersen's earnings in 1995 were only $20 million on revenue of $215 million.
But analysts now are giving the company a thumbs-up.
"We think it's a good sign the stock held steady in a turbulent market," said Drew Marcus, media analyst for BT Alex. Brown Inc., which has given Petersen Cos. a buy rating. "Petersen in a lot of ways is more similar to a pure play media consolidation strategy because they are planning on staying within their core competencies and building from within."
Petersen's management has gone out of its way to differentiate itself from other media companies, like Primedia (formerly K-III Communications). Primedia's stock has been trading recently at around $13 a share.
"What we sold was the future of special interest as opposed to general interest. We are saying that we are going to grow by building around our cluster of special-interest titles," said Mr. Dunning. "Unlike K-III, which is multi-platformed, we have one platform- special interest."
He also pointed to the company's plans to create line extensions for many of its titles, as well as efforts to bring in new advertisers as ways Petersen is planning to grow.
Petersen's titles include Motor Trend, 'Teen, Guns & Ammo and Sport.
Susan Decker, media analyst at Donaldson, Lufkin & Jenrette, wrote in a report on Petersen that the company "currently trades at a significant discount to its peers."
That discount makes Petersen a compelling buy in Ms. Decker's view, because of the growth potential in line extensions and a drive to improve the profitability of existing franchises.
Ms. Decker also believes if Petersen delivers on its ability to generate $40 million to $50 million in free cash flow beginning in 1998, it will allow the company to completely repay its debt in the next three years.
DELIVER ON PROMISES
Not to say those next three years will be easy. Petersen, like the rest of the industry, faces increased paper and postage costs in 1998.
It also must deliver on its promise to increase ad revenues through non-endemic categories, while investing in line extensions.
Still, Mr. Dunning said, "All of these [line extension] activities are developed to create revenue. We're very confident that we will grow 15% on the top line