Canadian media and entertainment company Corus Entertainment (OTCPK:CJREF) recently posted a pre-Q4 update as macro slowdown headwinds and the lingering post-COVID impact pushed TV advertising revenue down more than expected. , was a negative surprise.In addition to As well as short-term pressures across the advertising market, Corus’ channel business faces long-term competitive pressures as streaming players move into the ad-supported tier. It also does not factor in a recession scenario (which has become more likely after his Fed meeting this week) and will almost certainly result in a revision to consensus forecasts for 2023/24. .
In short, challenging fundamentals mean this is a cheap stock for a reason. But with FCF yields (as a % of market capitalization) currently over 40%, the valuation case is probably too strong to ignore. In addition, management is aggressive on capital returns, implementing an aggressive buyback program and delivering high single-digit dividend yields (backed by a low payout ratio of 20-25%). Despite a slight upside catalyst on the horizon, patient and long-term investors are willing to push through it, so it should pay off over time.
Negative update hints at difficult quarter ahead
Corus recently issued a negative operational update, citing the complex macro environment and the lingering impact of the COVID pandemic. “Meaningful year-round softness” in TV advertising revenue in the fourth quarter. In line with previous comments, spending in the automotive, health and beauty, and travel end markets remains the main source of weakness.
While the nature of the headwinds is not surprising at this point, the extent of the recent downward revisions was a negative surprise, especially given previous attempts to reset expectations lower. The prospect of a recession appears to be having a much tougher impact on Q4 numbers than previously expected, especially on the advertising side of the business. From my point of view, this makes sense. During periods of economic downturn, the marketing budget tends to be the go-to area for cutting spending. A faster-than-expected pullback also poses significant downside risks to guidance beyond the fourth quarter.
Consider the impact on profit and loss
The flow-through effect of advertising revenue on P&L can be significant, especially in brand advertising (versus performance advertising). TV ad revenue, off its 2019 high of about $967 million, is below pre-COVID levels and looks set to decline further from its already low 2022 base. A short-term rebound in travel and advertising spending could provide some relief, especially as supply chain issues around the automotive sector ease, but prospects for these improvements are limited. Nor is there any possibility of compensating for reduced advertising budgets.
With little recourse on the revenue side, management will have to rely primarily on programming-side cost adjustments to mitigate some of the EBITDA impact. However, this will take time and in the short term it is unlikely that you will have enough flexibility to fully protect your margins. In addition, medium- to long-term threats from large streaming players like Netflix (NFLX) and Disney (DIS) must be addressed (likely through content investments and digital service enhancements). It could put more pressure on the P&L.
Cycle-wide cash generation and capital return potential offer a ray of hope
While the near-term fundamental outlook is endlessly bleak and there is little upside catalyst to trigger a significant stock recovery, Corus has a lot going for it valuation-wise. Its cash generation has been strong across the cycle, improving its balance sheet position, with an FCF yield of over 40% after recent drawdowns.
The increased capacity has enabled more repurchase activity, and management’s decision to stick to an aggressive repurchase program underscores its belief in an undervalued stock. If stocks continue to fall toward a potential recession, my base scenario is for management to further ramp up share buybacks. In addition to FCF buybacks and debt repayments, Corus also maintains an attractive dividend (currently yielding over his 9%). Dividend payouts are also in the 20%-25% range, making yields sustainable in most economic scenarios. In my view, even in the worst case scenario, the company has enough cost levers to maintain the required FCF.
Attractive valuation case outweighs near-term headwinds
Corus’ latest guidance reset may be a sign of what’s to come. Due to the current macro challenges (inflation and rising interest rates), advertisers are cutting spending and end-consumer demand is weakening. In the short term, it’s hard to see a case for upward revision here, but the long-term fundamentals are poised to navigate a rapidly changing media landscape to deliver sustained year-over-year earnings growth targets. I’m not particularly optimistic about the latter, but so are the markets. Corus shares currently offer his FCF yield of over 40%. In addition, the high single-digit dividend yield (low payout %) is attractive despite rising interest rates. Combined with aggressive share buybacks, the total shareholder return yield is about the same as his Corus shareholders. At this point, investors need a high pain threshold to own this name, but investors willing to stick it out should do better over time.