ET Canada hosts are shown in a handout photo. Last Friday, Corus Entertainment suspended its common share dividend, conserving cash to pay down $1.1-billion of debt.HO/The Canadian Press
Value investors such as Warren Buffett and Prem Watsa make their fortunes by being greedy when others are fearful and acquiring quality stocks at cheap valuations.
They also make their money by largely steering clear of value traps. They avoid unloved stocks that appear, at first glance, to be inexpensive. On closer inspection, they realize these businesses face challenges their leaders cannot overcome and stock prices that may never recover.
In a domestic market littered with value opportunities – in real estate, banking, retail, tech and media – it’s never been easier to spot the traps. In many cases, these are companies that private equity funds decided not to buy. To understand this dynamic, look no further than what’s played out at Corus Entertainment Inc. CJR-B-T
Last Friday, the media company that owns Global Television suspended its common share dividend, conserving cash to pay down $1.1-billion of debt. Corus chief executive officer Doug Murphy linked the austerity campaign to an understandable and seemingly temporary issue: Hollywood writers and actors went out on strike, which delayed production of television programs, holding back advertising revenue.
Corus’s share price fell 29 per cent on news of the dividend cut, and is down 70 per cent over the past year. The steep drop in valuation should make the broadcaster a textbook example of a fallen angel, with a clear path for its return to grace. After all, TV writers are already back at work. Once actors settle with studios, Corus should be just a few weeks away from a rebound in ad revenues.
Here’s the value trap. Corus faces secular shifts in the media landscape that will continue long after Hollywood stops walking the picket lines. In a report, Scotiabank analyst Maher Yaghi said falling revenues at deeper-pocketed companies such as Comcast Corp. show “the decline in demand for advertising and media continues to be a challenge for the broader industry.”
The most casual TV viewer can understand why Corus is going to struggle to attract the audiences and ads it commanded in the past. Last Friday, Mr. Murphy highlighted the upcoming season of Survivor and the Canadian premiere of Yellowstone as bright spots in the broadcaster’s future. Value-focused investors have no reason to get excited about the 45th instalment of a reality TV show and the domestic debut of a Kevin Costner series most viewers have already streamed.
The fact that Corus faces significant headwinds shouldn’t be news to anyone. Private equity investors and rival broadcasters figured it out five years ago, when the Shaw family-controlled company conducted a strategic review and failed to attract a buyer.
Potential Corus owners looked at the future of conventional television, and decided their capital was better spent elsewhere. Bell Media owner BCE Inc. BCE-T, for example, spent $410-million last week to buy the Canadian operations of outdoor advertising company Outfront Media Inc. OUT-N
In recent months, a number of companies with stock prices that are cheap by any conventional measure have launched or concluded strategic reviews. The list includes Laurentian Bank of Canada, which parted ways with its CEO after failing to find a buyer, and Northwest Healthcare Properties Real Estate Investment Trust, which slashed distributions last month as it moves to pay down debt.
The value of these businesses seems obvious. Laurentian stock trades at roughly 60 per cent of its book value, a historic low versus rival banks. Northwest owns 230 medical offices and hospitals in eight countries, a seemingly recession-proof portfolio. Yet to date, no bidder has stepped up.
If private equity funds – awash in cash they need to put to work – and industry rivals are steering clear of stocks that appear to be cheap, they are signalling that the company’s future doesn’t match its past. Today’s market is full of potential value traps that wannabe Buffetts and Watsas should avoid.