The changing landscape in the entertainment industry has presented a number of opportunities for investors. While good opportunities exist for the growing companies that are trying to disrupt the industry, the best opportunities lie in mature businesses that have been oversold, if they have what it takes to survive.
Large companies that have been in the industry for a while won’t go down without a fight, and the importance of content creation and ability to distribute content to consumers are key in the fight for survival.
One Canadian company that has been through a rough patch the last five years but has a plan to turn things around is Corus Entertainment (TSX: CJR.B).
Corus started its turnaround by first focusing on its debt levels, which caused the stock price to fall from the mid-$13 range in 2017 to the $4 range in 2018. The company addressed the excessive leverage by first slashing the dividend to pay down more debt and work to optimize its operations.
During the company transition, Corus has become more heavily weighted to TV. The company has 37 specialty channels and 15 conventional channels to go along with its 39 radio stations.
The TV segment does most of the company’s business, as evidenced by looking at Corus’s source of revenue: 91% of revenue and 93% of profit for the company comes from the TV division. The other 9% and 7%, respectively, come from radio.
The TV segment consists of all the channels plus Corus’s content business. The content business includes production and distribution of TV shows and movies. It also includes any merchandise or other rights associated with ownership of content.
The Radio segment operates in urban areas with high population growth. All the radio stations are located in English-speaking areas, with the majority of stations in the densely populated area of southern Ontario.
The share of revenue across the entire business has 63% of revenue coming from advertising, while 31% comes from subscribers. The remaining 6% comes from merchandise distribution and other related revenues.
Free cash flow has been growing as margins improve due to the low capital-intensive business. The company delivered $349 million in free cash flow for 2018 compared to roughly $265 million for the year before.
Revenue has continued to grow the last few years, albeit pretty slowly. For the first six months of fiscal 2019, Corus did $852 million in revenue versus 2018’s numbers of $827 million — an increase of 3%.
The company has done a number of initiatives to help continue to grow the brand. Firstly, it launched the Global Go app, allowing customers to live stream its content on the go. Additionally, Nelvana, Corus’s animation studio and children’s media company, has been driving content creation. It has done well recently to create fresh content as well as selling its existing content around the world.
Due to recent studies, Corus expects TV advertising to rise as the study’s main thesis proved that TV advertising is still one of the best ways to reach consumers, especially specific consumers depending on the program they are watching.
Although TV advertising may still increase, the company continues to face cord-cutting risks, as more and more companies roll out streaming services and the industry continues to evolve.
Recently, when Shaw Communications sold its stake in Corus, it had a tough time even finding buyers to complete the sale, signalling that investors still aren’t comfortable with Corus’s turnaround progression.
I tend to agree with the Street, and although the company has shown it has a plan to turn things around, it is yet to be seen if that plan will work out.
At current prices, the company seems fairly valued, and although there may be room to grow in the future, over the short term, investors would be advised to take a wait-and-see approach to gauge how the company can deliver on its plans.
Stay hungry. Stay Foolish.
