Shares in Corus Entertainment (TSX: CJR-B-T) opened 4% higher on Friday after the TSX-listed media company announced its 2nd quarter results. Earnings were lower than they were 12 months ago due to a change in the company’s accounting policy, but this was expected, and EPS were ahead of analyst forecasts. Adjusted earnings came in at C$0.07, while analysts expected C$0.05.
The market took its cue from the 4% rise in revenue, driven primarily by an 11% jump in TV ad sales. For investors, this was seen as a sign that Corus’ turnaround is on track.
The stock was once a favourite dividend stock, but investors attracted by the generous yield have been burnt in recent years. Between 2015 and September 2018 the stock price fell 85%, with the lowest level coming shortly after the dividend was slashed by 80%. Since then it has nearly doubled but remains well off its all-time highs.
Corus is Still Generating Cash
Corus generated free cash flow of C$ 83.9 million for the quarter and $126.3 million for the year to date. This allowed the company to declare a C$ 0.0588 quarterly dividend, as well as Class B quarterly dividend of C$ 0.06/share. The dividend yield remains at 3.6% but should be seen in the context of the large dividend cut last year.
The strong cash flows have also allowed Corus to pay down debt and its deleveraging program is now ahead of schedule.
Radio Business Revenue and Profitability Continue to Slide
This was the second consecutive quarter of growth in the television business, after 12 months of shrinking sales. However, growth in TV advertising sales was partially offset by falling subscriber and merchandising sales in the segment. The segment profit grew 10% for the quarter and the profit margin grew to 32% for the quarter, and a healthy 38% for the year to date.
Revenue for the radio segment fell 8% in the quarter and 4% for the year to date. Profit for the segment fell to $1.9 million for the quarter, while the margin fell from 25% to 16%. However, it is worth noting that radio makes up less than 10% of Corus’s revenue.
Focusing on Original Content
Corus’s historical business is in secular decline, and it is pivoting to cater to the changing media environment. It has been investing heavily in original content to capitalize on the trend toward streaming services. However, with cash-rich businesses like Amazon and Netflix producing their own content, this is a very competitive industry.
CEO, Douglas Murphy, gave few specifics about the future, possibly because it’s so difficult to tell what will happen. With the accounting changes, it’s also hard to value the business based on current earnings. In hindsight, the stock was probably very cheap in September last year, but at these levels, it may be close to fairly valued.
Some investors see Corus as a potential takeover target, and that may provide an underpin to the stock price. Add to that the 3.6% yield and potential growth from the content business, and there are worse stocks to own – but it’s also not a bargain at these levels.
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