Gannett's turnaround is driven by revenue stability, higher EBITDA and steady cash flow production. Progress on achieving revenue stability is a bit slow, but cash flow generation remains healthy. EBITDA progress is a bit slow, as well--2018 guidance suggests more time is needed. Management continues to evolve the business as they learn. Even though challenges remain, there are opportunities for more acquisitions. Gannett's current valuation is a compelling 3.9x EBITDA, and offers an attractive, well-covered 6.3% yield.
The turnaround at media and entertainment company Viacom (NYSE: VIAB) rests on an improving balance sheet, combined with higher margins and revenue stability/growth, led by new CEO Robert Bakish. First quarter 2018 results showed progress in the first two, but some slippage in revenues.
With the sting of Wall Street disdain battering its stock, we saw promising value investing opportunity here and felt its depreciated price failed to reflect Time's implementation of several important changes that indicated that a successful turnaround was in the works.
Media and entertainment producer Viacom (NYSE:VIAB) reported mixed results for 4Q17 as domestic affiliate fees remain weaker than expected. Looking to 2018 and beyond, the new management guided toward weaker near-term revenues in the U.S. but provided encouraging signs that the overall turnaround is making progress. International revenues and profits continue to improve, and Paramount could become profitable in 2018. Stability under new CEO Bob Bakish and the ownership structure is working. At 7.6x forward EV/EBITDA with improving fundamentals, strong cash flow and a strong balance sheet, Viacom shares could be poised for a stronger 2018.
Publishing and media company Time, Inc. (NYSE: TIME) has reached an agreement to sell to Meredith Corp for $18.50/share in an all-cash deal. The transaction is highly likely to be completed, so we are moving our rating to a HOLD. There is an outside chance that a higher, competing bid is made, otherwise we would move our rating to a Sell.
Newspaper and media company Gannett (NYSE: GCI) reported strong 3Q17 earnings. Key components of the Gannett thesis (cost-cutting faster than revenue declines, growth of digital revenues and strong cash flow) remain on track. A week after the call, the company announced an organizational change into two units, Marketing Solutions and Consumer, which we believe makes sense.
The movie theater industry presents a very timely example of the cyclical versus secular dilemma. The stocks of the theater operators have been among the worst performers this year. While the broad market has gained nearly 13%, many stocks in the theater industry have declined by 20-50%. Are the problems secular or cyclical? The right diagnosis could mean a huge difference in returns.
We believe the stock market has missed several critical parts of this value stock's story. Plus, its cash flow is healthy and debt is only $395 million, about 1.2x EBITDA, and is partly offset by the $90 million in cash. The small-cap also holds a surplus real estate portfolio worth perhaps $80 million.
At best, the broad stock market’s 15.8% drop since its peak only three months ago on September 20 has been disconcerting. The deeper 23% plunge in small cap stocks, as measured by the Russell 2000 index: startling. For the weakest 9% of S&P500 stocks – often those with some type of unfavorable macro exposure – their average loss of 40% in such a brief time has been simply jaw-dropping.
EV/EBITDA: What Is It & Why Are We Using It More?
In reading recent editions of The Turnaround Letter, you have probably noticed that we are increasingly using EV/EBITDA as a valuation measure, rather than the better-known price/earnings multiple. We thought it might be useful to describe this measure and why we like it.
This Forbeswrite-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.
George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."