Deciding to take a contrarian look at a stock that has been punished is a big decision. But if you’re a value investor trying to judge the possibility of a turnaround, looking for fallen angels can be a profitable way to go.
Once called the Walt Disney Co. (NYSE:DIS) of Canada, DHX Media Ltd. (TSX:DHX.B)(NASDAQ:DHXM) fits the bill of a fallen angel. It has many of the attributes of desirable value investment, but is it worth taking a risk on this decimated stock?
After rocketing upwards to around $10 a share a few years ago, DHX has seen its stock price collapse to just under two dollars at the time of writing. The long, slow decline was the result of multiple factors, from falling television viewership to its large debt load resulting from its multiple acquisitions.
The case for contrarian value
There is a case to be made for buying this company. It owns the rights to strong brands, is very cheaply valued at first glance on a price to book basis, and might be making some strategic decisions that could put it on the right path.
DHX is one of those companies you want to love. It has bought the rights to numerous well-known brands, expanding its portfolio of properties significantly over the years. The company owns the rights to well-known classics like the Peanuts’ cast of Snoopy and Charlie Brown as well as beloved children’s characters like Caillou and the Teletubbies. It also recently acquired WildBrain, a creator of children’s content that markets on web-based platforms such as YouTube and Apple TV.
The company hopes that the WildBrain acquisition, with its access to popular web-based streaming sites, will help it gain access to more viewership that its traditional, television-based content strategy could not provide. It has teamed up with Apple Inc. (NASDAQ:AAPL) in order to offer premium content on the company’s platforms. There has been some headway with WildBrain, with this segment’s revenue growing 13% in Q2 2019 year-over-year.
2018 was a period of restructuring that the company hopes will help get its house back in order. Over the course of the last year, DHX worked to streamline its operations, reducing its facilities by 58,000 square feet and its personnel by 28%. It also has been trying to tackle its mountain of debt, reducing its net debt by 31% as of Q1 2019. And with its price to book ratio of 0.8, it certainly looks cheap.
But is this company a buy?
But the fact remains that there are a lot of issues with the company that still need to be resolved. It has hitched its proverbial wagon to Wildbrain in hopes that it will drive the company back into growth mode.
And while lower than it was a year before, DHX still has a mountain of debt that will likely plague the company for years to come. The debt has hurt the company greatly, even leading it to sell a large stake in its valuable Peanuts brand to Sony to get cash to pay down its leverage. DHX’s dividend was also a victim of the high leverage, having been cut significantly to allow the company to focus on paying conserving capital for debt reduction and corporate growth.
The cheapness of the company is also in question. DHX trades at cheap book value, but a lot of that value is tied up in goodwill. And while its WildBrain revenue grew double-digits in Q2 2019 over the same quarter of 2018, consolidated revenue was down 4%.
Stay away for now
The best time for value investors to buy companies is often when they have run into problems, leaving the share price depressed. Unfortunately for DHX, there is simply too much risk to take a swing at this stock right now. If WildBrain takes the company to new heights, this might be a buy. But at the moment, the risks outweigh the rewards.
