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Go west for value

A stock that traded above $15 pre GFC and close to $8 in 2010 is now trading around 60 cents. It’s grabbed the number one spot in its industry and has a management team with a strong operating track record. There is a clear value argument, despite the fact the consensus forecast is for a further edging down in revenues in the next three years.

Why is this stock trading cheaply?

Seven West Media (SWM) is perceived as an “old” media stock. Certainly Seven Television, Pacific Magazines, various radio stations and WA News (papers) are part of the conglomerate. However it has online exposures as well, most notably through Yahoo and its digital television channels.

This straddling of the old and new means SWM does not have the high-growth profile of a purely new media start up. On the other hand there is an argument that it well placed to roll with the evolution of the industry. The hard reality of online media is that profitable business models are difficult to identify, and having legacy income streams can support media groups as they continue the search.

After sustained pressure, earnings have dropped by more than 50% from 2014. Now, the consensus forecast suggests analysts believe the group is close to base earnings. The drop in share price to record lows puts SWM on a more attractive earnings multiple. At current prices the P/E ratio is 6-7 times both next year’s earnings and the average of the next three years Despite the pressure on the business this compares well to a market multiple around 18 times earnings.

Further, the shares paid 4 cents in fully-franked dividends last year. If it does the same this year that’s a dividend yield (including franking) north of 8.5%. Consolidation in the sector may also mean potential takeovers or mergers.

The outlook for media revenues remains clouded, with further disruption of traditional models likely. In my view SWM’s share price is at a level that makes it a potentially higher risk, potentially higher reward investment.

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