I love profitable businesses which produce high returns on capital, pay investors high dividends, and are cheaply valued. As a result, I recently ran a screen to find out businesses that possesses the above-mentioned qualities in the media and broadcasting sector.
The stock screening included four main criteria: (1) the stocks must be in the media and broadcasting sector, (2) dividend yield must be above 4%, (3) return on capital must be higher than 15%, and (4) EV/EBITDA must be in the range of 1 to 10. Let’s have a look at the top three companies.
A Russian television channel operator
CTC Media, Inc. (NASDAQ:CTCM) is the operator of three Russian television channels including CTC, Domashny, and Peretz. While CTC Media, Inc. (NASDAQ:CTCM)’s signal covers around 100 million people, the signals of Domashny and Peretz cover around 63 million and 61 million people, respectively. CTC Media, Inc. (NASDAQ:CTCM), which is considered the company’s flagship network, was the fifth most-watched channel in Russia, with an average overall audience share of 6.9% in 2012.
The business employs quite a conservative capital structure. As of December 2012, it had $728.3 million in total stockholders’ equity, $187 million in cash and short-term investments, and only $13 million in short-term debt. What might worry investors is its high goodwill and intangible assets of $400 million. Thus, its tangible book value stayed at $328.3 million.
CTC Media, Inc. (NASDAQ:CTCM)’s business seems to be quite profitable with as much as 43.5% return on capital and 28.9% operating margin. At $12 per share, CTC is worth around $1.9 billion on the market. The market values CTC Media, Inc. (NASDAQ:CTCM) at around 7 times EV/EBITDA. At the current trading price, CTC offers investors a juicy dividend yield of 5.2%.
Negative book value and substantial leverage
Regal Entertainment Group (NYSE:RGC) is the operator of the biggest and the most diverse theater circuit in the U.S., including 6,880 screens in 540 theaters in 38 states and the District of Columbia. The majority of its revenue, $1.93 billion, or 68.3% of overall revenue, was generated from admissions while concessions contributed nearly $750 million in revenue in 2012.
Regal Entertainment Group (NYSE:RGC) has a weak balance sheet with a lot of leverage. As of December 2012, it had a negative equity of nearly $700 million, $110 million in cash, and as much as $1.9 billion in long-term debt. Investors might think that Regal Entertainment must be a cash cow in order to take on heavy debt burden. Indeed, in the past ten years, Regal Entertainment Group (NYSE:RGC) has generated consistently positive, but fluctuating, operating cash flow and free cash flow.
In 2012, its operating cash flow was $347 million while the free cash flow stayed at $257 million. With $533.5 million in EBITDA, the net debt/EBITDA is around 3.35.