Such an exciting time to be a consumer of television and video in Canada! Netflix is expanding, Shomi and Crave TV are broadening their reach, and new "à la carte" rules mean greater choice in cable TV starting next year. Seemingly every day, there are more signs that the old ways of television are fading into the past.
Which is not good news for companies that have profited … well, from the old ways of television. And chief among them may be Corus Entertainment Inc., the company that gets 80 per cent of its revenue from television programming and the remaining 20 per cent from conventional radio. The shares are off nearly 50 per cent from their 52-week high, hitting their low earlier this month.
The problem is that Corus' results, in which both advertising and subscriber revenues (the fees received from cable operators) are falling, seem to confirm the thesis about secular declines in its main businesses. Corus' poor recent results have led to even worse evaluations from Bay Street, with a number of analysts slapping the rare "sell" rating on the shares.
Here's the thing, however: Corus still generates mountains of cash, and pays just a part of it out in a dividend that now yields 8.6 per cent. There's little evidence a cut is on the horizon.
Investors willing to risk their capital by betting that Corus can transition from the old ways to the new, then, will get a handsome amount of income as they watch this story unfold.
Corus, once part of Shaw Communications, will mark its 16th year as a public company next month. The company's core has been children's programming: It owns YTV, the preschool-targeting Treehouse TV, an animation studio called Nelvana, and it has acquired the Canadian rights to Nickelodeon and Disney, as well. Over time, Corus broadened its offerings to include a number of womens' channels, Movie Central and HBO Canada.
At one time, that collection of content would be considered world-beating. But of course, an increasing number of Canadians, most young but not all, are "cutting the cord" on conventional cable. Advertisers are noticing, and moving their dollars. The Canadian government's Let's Talk TV overhaul will require cable operators to provide slimmed-down, less-expensive packages of channels as well as the "à la carte" option to pick individual channels in 2016.
As RBC Dominion Securities Inc. analyst Haran Posner puts it, Corus "does not have its head in the sand" about the structural and regulatory challenges. But the company's report for the third quarter, ended in May, suggested that there are a number of problems out of Corus' control. Revenue declined 5 per cent and missed analysts' consensus expectations. The company's EBITDA, or earnings before interest, taxes, depreciation and amortization, fell 14 per cent, also missing expectations.
"This quarter reflected a worsening outlook for Corus," wrote analyst Aravinda Galappatthige of Canaccord Genuity Group Inc., who has a "sell" rating and target price of $13.50, compared with Friday's close of $13. "Advertising declines in TV are showing no sign of abating and remain at double-digit rates, and now we are seeing pressure on the subscriber revenues as well. There is clearly a broad-based trend with advertisers and ad agencies re-assessing their spend mix in favour of digital platforms and [specialty cable channels are] feeling the brunt of this."
To CIBC World Markets analyst Bob Bek, this is the manifestation of his "Cracks in the Wall" thesis, which he introduced in 2011 and reiterated last fall: There will be continued pressure on TV assets given wider acceptance of television delivered via the Internet (i.e., Netflix, Hulu). "Recent developments suggest that the 'cracks' are real, and that structural pressures are now firmly entrenched for broadcasters, with Corus' recent results reflecting as much."
Mr. Bek, who has a "sector perform" rating and $16.50 target price, suggested in July that investors inclined to buy in to Corus look at it as a trading stock, with $14 a "floor" that represented a free cash flow yield of about 15 per cent. "While free cash flow continues to support the story, structural risks are clearly being reflected in its outsized current yield," he noted.
Well, Corus has broken through that floor, and the yield has become even more outsized. Yet the Corus analysts, no matter how bearish, aren't suggesting a cut is imminent. Barclays Capital's Phillip Huang, who has an "underweight" rating and $17 target, estimates Corus' payout at just 51 per cent of current free cash flow. "We do not see a near-term risk to the dividend." (Thomas Peddie, Corus' chief financial officer, says that the company is forecasting to achieve its free cash flow guidance, which will support the sustainability of the current dividend.)
TD Securities' Vince Valentini, who has a "buy" rating and $18 target price, models an annual 5 per cent dividend increase and still figures on payout ratios of just 62 per cent in 2016 and 71 per cent in 2017. "This leads us to conclude that the risk/reward is favourable at current levels for long-term value investors."
And there are also those among the analyst group who feel the structural challenges to Corus are overstated, particularly with the company's recent content-acquisition deals.
Tim Casey of BMO Nesbitt Burns Inc. has a "market perform" rating and $15 target price, saying the stock will likely suffer from continuing disappointing results in the near term. However, his take on the regulatory changes is that the current method of packaging channels will, in many cases, offer more value than à la carte, and Corus' "largest and most iconic channels … are likely to remain in demand and could be favoured by à la carte subscribers."
David McFadgen of Cormark Securities Inc., who has a "buy" and target price of $18.10, says he has a "belief that management is making the right investments to return the company to growth," with Nickelodeon and Disney yielding benefits by fiscal 2017.
Mr. McFadgen believes the shift of dollars from TV to the Internet will be "modest," and Corus' primary problems right now are a soft Canadian economy creating a weak advertising market.
In short, he says the old ways of making money in television aren't in as much jeopardy as many think. It's increasingly a minority view, but it would be a lucrative one for investors getting into Corus at these levels. Stay tuned.
David Milstead