Reader’s Digest a Familiar Name, but No Star

Reader’s Digest Assn. (RDA/RDB)

Jim: Don’t buy

Mike: Don’t buy

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Jim: When it comes to Americana, Michael, I can’t think of any more tried-and-true name than Readers’s Digest, correct?

Mike: Did you say tried and true or trite and true?

Jim: Snippy right out of the box today, eh? But you’re right. To many people, Reader’s Digest isn’t just old, it’s musty old--as in not being of much use.

Mike: That’s right. When you flip the pages of Wall Street reports on this stock, moths come flying out. However, let’s start by noting one fact that’s really representative of this company. If you go to the line in its financial statement that reads “total debt” . . .

Jim: I know what you’re going to say.

Mike: The answer is “none.”

Jim: Yep, it has a squeaky-clean balance sheet.

Mike: This company is one of the most conservatively run outfits in history, and as we said, that history goes back a ways. Reader’s Digest was founded in 1922 by DeWitt and Lila Wallace. They established a headquarters campus in Pleasantville, N.Y., where employees were coddled, even getting occasional rides on the corporate plane.

Jim: The place also had bells that rang the end of the workday.

Mike: Which was 4:30 in the afternoon!

Jim: But the problem is that conservatism cuts both ways. It helps the balance sheet, but it has also prevented Reader’s Digest from keeping in step with the times.

Mike: Right. In fact, I want to steal a remark from Christopher Byron, a business columnist who did a piece on Reader’s Digest not long ago for the New York Observer. He asked the truly pertinent question, which is: Does anybody read this thing anymore? I mean, it has a paid U.S. circulation somewhere around 13 million, but I don’t know that I’ve ever seen anyone reading the magazine.

Jim: Well, the magazine’s circulation peaked in the 1970s. But the magazine per se isn’t what drives Reader’s Digest anyway, right?

Mike: Correct. What really drives the company is the magazine’s database of subscribers, who are constantly being asked by Reader’s Digest to buy other items via direct mail. The magazine itself accounts for less than 30% of Reader’s Digest’s annual revenue of about $2.5 billion.

Jim: Subscribers are asked to buy condensed books, music, videos and even other magazines. Reader’s Digest is especially fond of peddling book series, such as those devoted to household repairs or health or cooking.

Mike: But it has become clear that the subscribers aren’t buying those items like they used to, Jim, because the company’s performance stalled badly beginning in the mid-’90s. And the stock reflects that. Reader’s Digest went public in 1990 and, as I crunch the numbers, over the last decade this stock has returned an average 3.7% a year. It peaked in 1992 around $56 a share.

Jim: Not very impressive.

Mike: It’s sort of analogous to the experience of reading Reader’s Digest, isn’t it? It’s hard to avoid getting lulled to sleep.

Jim: For the record, Reader’s Digest has two classes of stock that are publicly traded: The nonvoting A class and the voting B stock. But each basically tracks the other in terms of performance. I wouldn’t buy either, because I don’t see them outperforming the general market going forward.

Mike: Me neither. What’s disquieting to me is that the company has brought in several chief executives over the years to liven things up, but they’ve all retreated, bloodied and bowed, because the corporate culture on campus was so resistant to change. They tell stories about how when, to save money, one CEO slashed the subsidies paid for the company cafeteria, dozens of Reader’s Digest employees discovered that they didn’t have enough money in their pockets to buy lunch.

Jim: Horrible.

Mike: This is a place with cadres of editors with 20 and 30 years under their belts who aren’t shy about telling some whippersnapper of a new CEO that some initiative of his is not the way they do things at the Reader’s Digest. It’s not impossible to change a culture like that, but it takes aggressiveness and it can’t be done without hurting morale.

Jim: Let me give you the Reader’s Digest version of what you just said.

Mike: You mean a condensed version or the company line?

Jim: The condensed version. This is clearly a hidebound company whose own inertia is holding it back. But let’s give credit to its current CEO, one Thomas Ryder, who has had some success slashing the company’s bloated costs and leveraging the power of the Reader’s Digest brand name.

Mike: There’s no question he’s got the company’s profit climbing again. In the nine months ended March 31, earnings before one-time charges jumped 32% from a year earlier, even though revenue showed no growth.

Jim: Ryder also has made several alliances with financial institutions, publishers and others to broaden the products that Reader’s Digest offers, and that includes some moves on the Internet. But I side with those who believe Reader’s Digest still isn’t moving fast enough to keep pace with its media competitors in today’s fast-changing world.

Mike: Not only that, you have to ask, what are these initiatives? Let’s say the company does move onto the Net even faster. What does that get them? I mean, its main problem is not how and where it distributes its products, it’s the customer base that’s being asked to buy this stuff.

Jim: You mean their core audience is, well, older.

Mike: Let’s just say it’s not exactly Web-savvy.

Jim: Good point. Now, there’s one big caveat here, and that’s the prospect of a takeover. Nothing has been announced, but rumors are flying that the company could be the target of another big publishing concern.

Mike: That’s a key reason the Class A stock jumped from $30 a share in early May to the $40-or-so level we’ve seen lately.

Jim: No matter. I wouldn’t buy this stock merely as a bet that a buyout is coming.

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michae.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).