Nine Entertainment Co Holdings Ltd (ASX: NEC) shares are trading 36% lower than just two months ago, but are they cheap or just less expensive?
Investing 101
It's sensible to consider investing rules given by expert stockpickers like Warren Buffett, Peter Lynch and some local heroes like Ian Huntley when considering investments. The basis for their investing success stemmed from always buying quality companies at good prices so my first question when analysing a company is whether I think it is a 'quality' company.
In my opinion, Nine lacks many of the attributes to be classified a 'quality' company. While it has scale and market dominance over its free-to-air TV competitors, it operates in a declining industry that currently doesn't appear able to keep up with the changing media consumption trends in Australia. Granted, it does have a stake in streaming service STAN, however it was too slow to launch the service so it's already a long way behind Foxtel and Netflix.
Then there's the group's falling profits! In early June, 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." This is another sign to watch out for. We want to invest in companies that are able to steadily grow earnings over time.
Just Less Expensive?
On traditional metrics Nine looks relatively good value. Its trailing price to earnings ratio of 8.4 and dividend yield of 5.8% compares favourably with the 16.3 and 4.5% of the wider market. Indeed, even its forward price to earnings ratio of 9.8 and yield of 5.8 looks appealing, so should investors risk it?
Analysts are forecasting earnings and dividends to grow each year through to 2019 and Nine certainly seems confident in its ability to transition the business away from its reliance on free-to-air TV advertising revenue.
Here lies the problem, analysts' estimates present the 'base case' if everything goes ok. What the estimates don't give is what will happen if things don't go quite to plan, like Metcash Limited (ASX: MTS) and Woolworths Limited (ASX: WOW). My belief is that Nine is going to struggle to turn around its revenue and profit problems, prompting numerous downgrades over the next 12 months as STAN will struggle to be competitive and fewer people will watch free TV.
