Indigestion: Wall Street Downgrades Reader's Digest

  • by January 27, 2006
Merrill Lynch downgraded its recommendation to Wall Street investors on Reader's Digest Thursday from "buy" to "neutral," based on lowered expectations of free cash flow.

"Although the expansion of RD into new countries and businesses is tracking above plan, the performance of Consumer Business Services segment was weaker than anticipated," the report noted. "Since free cash flow is the main appeal of RD's story near term, we think its share performance could be capped by the likely reduced expectations for free cash flow, while investors take a wait-and-see approach to RD's long-term growth initiatives."

Merrill Lynch also noted that Reader's Digest's earnings per share had dropped as a result of a $188 million charge the company took to write down the value of its Books Are Fun (BAF) unit and said: "We think the turnaround of BAF is also going to take time, especially because of the seasonality of the business."

The downgrade occurs as Reader's Digest implements an expansion plan, including a new consumer title featuring Food Newtork lifetyle diva Rachael Ray.

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