Shares of media companies Johnston Press (LSE: JPR) and Entertainment One (LSE: ETO) have both been hammered this week but for very different reasons.
Yesterday, Johnston Presss shares plummeted 20% after the group issued a profit warning. Today, Entertainment Ones shares are down 10% as I write, following news that a long-time institutional supporter has slashed its stake in the company by a third.
UK local and regional news group Johnston reported that having traded well in Q1, performance in Q2 was such that first-half revenue is expected to fall by 5% year on year. Management blamed a slowdown in general trading as well as specific weakness in the run up to, and the period immediately after the election.
On the face of it, the 20% fall in the shares appears harsh. The company said first-half profits are likely to be only marginally below last year, that, based on most recent indicators, July is expected to show an improvement and that we anticipate full-year profit will be slightly below market expectations.
However, Johnston is a heavily indebted company, with net debt of 185m versus a market capitalisation of 120m and a millstone of interest payments. If Q2 proves to be more than a blip or off-trend trading, as management called it the shares could have a lot further to fall. And the company did warn that, while it expects revenue trends to improve, sales may be impacted by market volatility during the rest of the year.
As an old-industry business that was late to respond to the digital age, Johnston has been struggling for years. If I held the shares, I would be tempted to sell and buy into Entertainment One.
Entertainment One is a leading international entertainment company that acquires, produces and distributes film and television content. Peppa Pig is probably Entertainment Ones best-known property, but the company has a large and diversified portfolio of media assets.
Since 2010, Entertainment Ones revenue and earnings have doubled. And management has a credible strategy to double the size of the business again over the next five years. Increasing scale should drive Entertainment Ones financial return, and there is a virtuous circle as the company attracts and partners with more and more of the worlds best creative talent.
In contrast to Johnston Press, todays hefty fall in Entertainment Ones shares has nothing at all to do with business performance or outlook. The company announced that long-term backers Marwyn Value Investors have sold 9% of their stake in the business, by way of a placing to other institutional investors.
I dont see anything sinister in Marwyns move to take some profits after supporting Entertainment Ones tremendous rise from an original AIM listing to its current listing on the Main Market and membership of the FTSE 250. Marwyn still holds about 18% of the companys shares. Entertainment Ones CEO said today that the directors look forward to Marwyns continued support as an investor. The knee-jerk reaction of the market seems to be a response to the possibility that Marwyn could decide to sell more shares, creating a stock overhang and short-term weakness in the price.
However, none of this detracts from Entertainment Ones long-term prospects, and I see the stock as good value after todays drop. The company trades on a current-year forecast price-to-earnings ratio of 13.5, falling to 11.7 next year on the back of forecast mid-teens earnings growth. As such, now looks to me like an opportune time to buy.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.