This is not what shareholders of Nine Entertainment Co Holdings Ltd (ASX: NEC) needed! After the market close on Friday afternoon, following a week when Nine's share price fell nearly 8%, the company released an announcement ominously titled 'trading update'. This may not sound too ominous to some readers, but when you're a shareholder in QBE Insurance Group Ltd (ASX: QBE) and Codan Limited (ASX: CDA) like I am, you become afraid of the dreaded 'trading update'.
Anyway, Nine "advised that it expects Group EBITDA (before Specific Items, and inclusive of Nine Live) for the year ended 30 June 2015 to be in the range of $285m to $290m. This compares with guidance provided at the AGM in November 2014 of a result in line with the $311m reported in the prior corresponding period."
What Happened? Nine's announcement comes about a week after analysts at JP Morgan downgraded valuations in the free-to-air TV sector following a review that concluded a massive meltdown was coming. At the time, JP Morgan's view was contrary to many in the market that viewed Nine as a solid defensive company due to its dominance of the (albeit slowly declining) TV industry and rock-solid balance sheet.
What now? It remains to be seen how far the share price will fall when trading resumes on Tuesday morning but my guess is that the move will be significant. The on-market share buy-back, the launch of streaming service STAN, and the $640 million sale of Nine Live have kept the share price above $2 since late February, but an 8.3% reduction in EBITDA would imply an equal or greater impact on net profit, which most brokers expected to rise by nearly 10% this financial year.
I would expect that the share price of major rivals Seven West Media Ltd (ASX: SWM) and Ten Network Holdings Limited (ASX: TEN) will fall a similar magnitude as woes at the industry's leader surely does not bode well for competitors.
What can you do? The best thing investors can do is listen to the wise words of one Mr Warren Buffett, who says to only ever invest in great companies at great prices. I would argue that Nine is not a great company- it is the market leader in a sector being decimated by the changing consumption trends provided by widespread internet use.
An even better idea is to check out smaller companies that are disrupting the major players- just look at the success of Apple which revolutionised the way people interact with digital devices.
