It hasn't been a very mellow experience for investors in music channel provider Stingray Digital Group Inc. since it went public just over a year ago.
Shares of Montreal-based Stingray, which provides music channels for pay television operators as well as airports and retailers, has swung between a low of $6 and high of $8.58 since it launched at $6.25 in early June, 2015. The company also recently announced it's facing a lawsuit from an American rival, while its dual-class share structure and low market liquidity are considered barriers for some investors.
On the flip side, the company's quarterly dividend, yielding about 2 per cent, high insider ownership, recent record earnings and aggressive acquisition mandate also make it attractive.
Analysts have rave reviews for the stock. All four that cover Stingray have a "buy" recommendation with an average one-year price target of $10, which is about 40 per cent above where it's currently trading around $7.
"Stingray is an acquisition and footprint-expansion story," BMO Nesbitt Burns analyst Tim Casey said in a recent note. He has a target of $9.50.
"We believe the company is well positioned to broaden its customer base over the next several years with a low-cost music streaming service that can be tailored to regional markets on scalable infrastructure."
GMP Securities analyst Deepak Kaushal has an $11 target, saying in a note that "high recurring revenue, strong profitability and growth upside from acquisitions merit a premium valuation."
Stingray said its revenue increased by about 27 per cent to a record $89.9-million in the year ended March 31, compared to the year before, driven by acquisitions and growth in international markets. About 86 per cent of that was revenue from existing customers. Profit more than doubled to a record $13.9-million or 29 cents a share from $6.6-million or 19 cents the year before.
Stingray makes money by selling packages of songs it licenses, receiving a fee per subscriber. About two-thirds of its business is from TV operators, and about 25 per cent from commercial customers, such as Subway and Pearson International Airport. About half of its revenue comes from Canada, down from about two-thirds a year ago, while the rest is from the United States, Latin America, Europe and Asia.
Stingray founder and chief executive officer Eric Boyko said the company's goal is to expand off of existing business, but also grow through acquisitions.
His goal is to do about five deals a year and to have international revenue represent 75 per cent of the business in the next five years.
The company's most recent acquisition (still to close) was four specialty music television channels from BCE Inc.'s Bell Media division, including MuchLoud, MuchRetro and MuchVibe, as well as music video channel Juicebox, for an undisclosed price.
In an interview, Mr. Boyko sees growth coming from mobile users, in international markets like the U.S. and by cross-selling its products. The goal is to continue to increase cash flow and its dividend, which currently pay investors 3.5 cents quarterly.
"This is a company where management owns a big part of the stock and are very motivated by good cash flow and good dividends," Mr. Boyko said.
Pension fund manager Caisse de dépôt et placement du Québec recently increased its stake in Stingray, citing "significant growth potential."
The investment comes despite a reluctance some investors have to purchase companies with dual-share structures because of the limited voting right for common shareholders.
Mr. Boyko said the dual-class structure helps to protect the company against a hostile takeover, while it focuses on building the business.
"Having multiple-voting shares gives management a lot of freedom to focus on the future, the long term, and not to be worried if Bell, Rogers, or Telus or Shaw is going to do a takeover on us if we have a bad quarter and our stock goes down," Mr. Boyko said.
He said the company could have been at risk of a hostile takeover in December when its shares fell to $6 amid global market volatility.
Today, 21 per cent of the company is owned by insiders, who control about 55 per cent of the voting shares.
Peter Imhof, vice-president and portfolio manager at AGF Investments Inc., said he considered buying the stock when it went public last year, but was turned off in part by its low liquidity. He said the recent lawsuit is a concern, even thought Stingray has said there is no merit to the allegations.
U.S. digital music company Music Choice is suing Stingray Digital Group Inc. for patent infringement. Stingray said the lawsuit is "motivated by competitive concerns rather than a desire to protect its intellectual property."
Mr. Imhof also believes the stock is a bit expensive today, trading at about 23 times forward earnings.
"They have had decent growth," said Mr. Imhof, adding that "it's not a screaming buy at these levels."