Warren Buffett famously noted during an interview that while turnaround stocks can be appealing, investors should always take care as "turnarounds seldom turn". Just ask investors in the likes of Lynas Corporation Limited (ASX: LYC) who have been waiting for a turnaround in fortunes for years, or Fairfax Media Limited (ASX: FXJ) who have watched the company struggle to adapt to the changing global media landscape.
Similar comparisons can be made to Ten Network Holdings Limited (ASX: TEN). The company was flying high in 2010 when the first couple of Masterchef seasons were dominating free-to-air television and Ten recorded its highest ever net profit before abnormals of nearly $97 million. At that time, Ten had a market capitalisation of over $1.4 billion, revenue of nearly $1 billion, and therefore a profit margin of just under 10%.
How Times Have Changed!
Internet television, an array of new movie streaming options and questionable show choices have seen Ten's viewing numbers, revenue and profit slide since their 2010 high. Revenue plunged to just over $650 million in the 2013 financial year and the company lost $5 million before abnormal costs. Ten's market capitalisation is now below $700 million.
First-half results
Last week, Ten released its first-half results for the 2014 financial year. The company recorded a net loss of $8 million on increased revenue of $329 million but higher operating costs. Despite the loss; Ten's strategy for the first half was reasonably successful.
Ten bought the rights to broadcast the Sochi Winter Olympics and the Big Bash T20 as a way of boosting viewership during the crucial December-January period. The period is important because it's the time when free-to-air networks advertise their major series that start screening from March onwards. The Olympics and the Big Bash T20 were huge successes, pushing Ten's share of viewers to multi-year highs.
Ten's share price jumped by more than 50% from December to February as investors saw Ten's fortunes finally changing for the better. Higher numbers of viewers in December should lead to more viewers for the rest of the year, and thus better advertising revenue.
A Disappointing Follow-up
Unfortunately for Ten and Ten's shareholders, the strong viewership over the Christmas and New Year period has not translated into more viewers for its stable of yearly series. So far, Ten's shows such as So You Think You Can Dance, Secrets and Lies, and Puberty Blues have failed to live up to hype and have struggled to gather big audiences when up against the likes of My Kitchen Rules and The Block.
Foolish takeaway
It appears as though the Channel Ten turnaround story has been another false start. The promising audiences over December and January have not translated into audiences in March and April, which has resulted in below-expectations revenue and profit. Some have questioned Ten's logic in going head-to-head with the most popular shows from rival channels, I believe this is a valid point as Ten could find more success by tapping lulls in rival networks' programming.
