Should you buy Seven Group?

For a company that is 68% owned by billionaire Kerry Stokes, Seven Group (ASX: SVW) perhaps doesn’t get as much attention as it deserves.

Not only does an investment in Seven Group give shareholders the benefit of Mr Stokes’ business prowess, but with interests that span industrial services, media and investments, Seven Group offers exposure to a diversified stream of earnings.

This diversity includes a 35% share of Seven West Media (ASX: SWM) – which owns the Seven Network and a number of other media assets including Pacific Magazines. Seven Group also has a listed share portfolio valued at around $760 million that in the past has included a significant investment in Telstra (ASX: TLS), a 45% share of the Coates Hire business, and exclusive licenses for sales of heavy equipment manufactured by Caterpillar in a number of regions throughout Australia and China.

While Seven Group has a number of appealing assets, the firm has found itself under pressure for two reasons. Firstly, the earnings that flow to Seven Group from Seven West Media have been declining due to the tough operating environment in the free-to-air television market. Secondly, earnings from the industrial services division are expected to decline substantially in the near future as the mining boom loses steam.

This state of affairs has led to the share price plunging from an all-time high of $11.69 in March 2013 to around $7 today. While obviously the market is valuing Seven Group significantly lower than it did nine months ago, the recent announcement that Seven Group will acquire the northeastern China expanded mining product (EMP) distribution and support business from Caterpillar suggests that management is also taking advantage of opportunities brought about by the difficulties facing the resources sector.

Foolish takeaway

While the Chinese EMP acquisition alone is unlikely to have a major effect on Seven’s overall earnings; a strong balance sheet and talented management team headed by Kerry Stokes make savvy acquisitions such as this possible.

However, despite the potential for value accretive acquisitions, recent AGM guidance reiterated that this financial year management expects earnings before interest and tax to be 30% to 40% below last year, this means Seven Group is a stock probably best left on the watch list for now.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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