Wednesday, 10 November 2010

Entertainment Companies: Potential Investment Thrills or Spills?

Statistics Canada publishes lots and lots of data with our tax dollars so it is pleasant to find that some of it, in the form of summary tables on the financials of industry sectors, can give us leads for potential investments. Table 1-4 tells us the Return on Equity for five years from 2004 to 2008. When we sift through the numbers, we find that the Arts, Entertainment and Recreation industry leads the pack with phenomenally high ROE of 60% or more. It has been consistently high as well. That looks promising, so let's use the same process we applied in Food Companies to Satisfy Investment Hunger to narrow the field to the most promising companies.

1) Finding the Candidate Stocks
Our first stop is a stock screening tool such as GlobeInvestor's, which includes the option to select an industry sector, in this case Entertainment. Your discount broker website will have a stock screening tool too; in BMO InvestorLine's case, it is the enhanced version of the Globe tool. The search pulls up 11 securities. Astral Media has two classes of shares under TSX trading symbols ACM.A (non-voting) and ACM.B (voting) so we will look only at figures for ACM.B. Cineplex Galaxy's CGX.DB listing is a debenture so we'll ignore it. That leaves us with 8 common stocks and the Cineplex Galaxy income trust .

2) Companies with Consistent Profitability
Our next step is to find the companies that are consistently profitable. To do that, we go to the Toronto Stock Exchange's investor website TMX Money and:
  • type in the stock symbol for each of the 9 candidates, then
  • click on the Financials tab and
  • pick the Income Statement and Annual View from the drop down menus
TMX shows the most recent five years of results. We select only those companies where there has been a profit i.e. whose Net Income has been positive, for at least four out of the last five years. That leaves us with five companies.
  • Great Canadian Gaming Corp (symbol: GC) - operates casinos, thoroughbred and standardbred racetracks, a community gaming centre, a hotel and conference centre, two show theatres, a bingo hall and food and beverage and entertainment facilities.
  • Cineplex Galaxy Income Fund (CGX.UN) - is the largest motion picture exhibitor in Canada, and leases or has a joint-venture interest in 129 theatres with 1,342 screens serving approximately 70 million guests annually. Like almost every other income trust facing the upcoming federal tax rule change, it intends to convert from an income trust to a corporation structure on January 1, 2011.
  • Canlan Ice Sports Corp (ICE) - develops, operates and owns multi-purpose recreation and entertainment facilities, mainly for ice sports and indoor soccer.
  • Astral Media Inc (ACM.B) - engages in the business of specialty, pay, and pay-per-view television broadcasting, radio broadcasting, and outdoor advertising in Canada
  • Corus Entertainment Inc (CJR.B) - has interests in radio broadcasting, television broadcasting and the production and distribution of children's media content.
3) Profitability, Growth and Value
The main initial indicator of potential value is a stock's Price to Earnings (P/E) ratio. Three of five of our profitable companies - ICE, ACM.B and CJR.B - exhibit a much lower P/E of between 11 and 14 compared to the 19.2 average of the TSX Composite (as of Nov. 4th). That is encouraging for our candidates. The other two have a P/E of about 21, a bit higher than the TSX, indicating the market is already anticipating higher growth for them.

The big surprise is that none of the companies carries a Return on Equity (ROE) anywhere near the stratospheric numbers of the Stats Can tables. This is a puzzle to which we can see no obvious answer. Private companies in the Stats Can data set (i.e. not publicly traded companies) might skew the data upwards, though it is hard to imagine how the effect could be so great.

4) Safety
Astral Media has a very strong ability to cover its interest expenses with good conservative numbers across the three factors to assess safety - debt/equity ratio, interest coverage and dividend payout. Great Canadian Gaming and Canlan have merely adequate safety numbers. Cineplex has a worrisome high payout ratio with cash distributions well above earnings, though the company maintains in its 2009 annual report that such a level of distributions is sustainable and it intends to pay out the same amount as dividends after conversion to a corporation. Corus is barely generating enough profit to pay its interest costs, not a good situation at all.

5) Returns and Market Sentiment
The market appears to feel that the future is rosy for all but Great Canadian Gaming as the share price appreciation of the four others has outstripped the TSX Composite by a significant margin as the Google chart image snapshot below shows (click here for live updated chart).

Analysts like them too and give four star ratings, as compiled by GlobeInvestor, for the four, excluding Great Canadian Gaming again. The average analyst recommendation is BUY for Cineplex, Astral and Corus (no rating is available for Canlan). Great Canadian even garners a Moderate BUY.

6) Past vs Future Returns
The good recent price rise of these stocks is nice but the future is what counts. The analysts' 12 month target price ranges suggest upside potential on average though some predictions are below current prices. We reiterate our caution about analysts made in Stock Market Analysts: add Salt and Pepper. Is the best behind us for these stocks? The numbers as a whole reveal no company with strong numbers across the board as some area or other is less than ideal in every case.

There is certainly more investigation and consideration required before deciding to buy shares in any of these companies e.g.
  • Will Astral Media again suffer a huge impairment charge against its assets as it did in 2009 and is the low P/E a sign of upside potential?
  • Is Cineplex's payout sustainable and is the stock already fully valued?
  • Can Canlan continue to grow and is its debt level a possible problem? (see TMX's Scorecard report here)
  • Can Corus find a way to grow revenues, to cope with its debt and will it need to cut its dividend?
  • Can Great Canadian Gaming start growing revenue again?
As with the products these entertainment companies provide, where the outcome of the plot or the game might provide thrills or spills, so could the investment result and you need to put chance on your side with thorough due diligence. The misleading Stats Can data is in itself a warning sign not to take only one piece of information as a definitive indicator. However, if you are a stockholder, you can at least be happy that you are paying yourself back a little when you watch that movie, make that bet or take that slapshot.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

No comments: