Stock in Focus: Why I won't be buying Entertainment One

Wednesday, Jun 14 2017 by
9
Stock in Focus Why I wont be buying Entertainment One

Entertainment One is best known as the controlling shareholder of the Peppa Pig brand.

The firm recently announced plans to produce no fewer than 117 new episodes of this very popular programme. This will take the total number of Peppa Pig episodes up to 381.

However, the new episodes won’t start airing until Spring 2019. And having read through the firm’s recent results, I’m concerned about the outlook for shareholders over the next couple of years.

As there are no new qualifying stocks for the Stock in Focus portfolio this week, I’m going to take a closer look at Entertainment One instead and explain why I’m not attracted at current levels.

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A falling star?

I’ve been impressed with Stockopedia’s new StockRank Style and RiskRating classification systems. Very often, these new classifications seem to me to be a very accurate representation of a stock’s likely character.

Entertainment One doesn’t fair well under this new system. It’s ranked as Speculative and as a Falling Star:

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Falling Star isn’t necessarily a terminal condition. But it does indicate that statistically, this stock is likely to underperform:

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However, I’m not basing my negative view on this rating alone. I think that Stockopedia’s ratios flag up several other reasons why now might not be the right time to invest. I also believe that Entertainment One’s latest accounts highlight a few areas of potential concern. Let’s address these factors one at a time.

The algorithm isn’t keen

If you’d like to review a stock in more detail without ploughing through the actual accounts, then breaking down the company’s StockRank is often a good place to start. As a reminder, you can find this information by going to the sector page for the stock and then clicking on each of the ranks to see the scoring breakdown.

Entertainment One doesn’t score especially well on any of the three main ranks (Quality, Value, Momentum):

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The stock’s QualityRank of 67 is the strongest of the three, but even this isn’t as impressive as it first seems. All of the factors are average or poor, except the Piotroski F-Score, which is a respectable 7/9:

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ETO’s library was independently valued at $1.5bn (c. £1.18bn) at 31 March 2016. This valuation hasn’t yet been…

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Entertainment One Ltd is a Canada-based independent entertainment company. It develops, produces, markets and distributes content. The Company's segments include Film, Television, Music, Family and Brands, and Innovation. The Film segment in collaboration with partners develops, acquires, produces and finances film content. The Television segment through partnerships and global distribution network produces and distributes television content. The Music segment built musical brands, as the Company is part of the network eOne Management Group. The Family and Brands segment is involved in the creation of family content and develops, launches and roll out content-related products. The Innovation segment provides digital content, such as virtual reality (VR) and the platform to discover it. more »

LSE Price
571p
Change
 
Mkt Cap (£m)
2,845
P/E (fwd)
20.3
Yield (fwd)
0.3



  Is LON:ETO fundamentally strong or weak? Find out More »


6 Comments on this Article show/hide all

janebolacha 14th Jun '17 1 of 6
5

There is great value in Peppa Pig and in its potential for marketing, spin-offs and theme parks.
Unfortunately, the CEO, Darren Throop seems to be fixated on seeing himself as Canada's answer to Hollywood, a kind of latter-day Louis B. Mayer but without the nous!
He insists on continuing to pour money into generally poor films that get nowhere. Example: Girl on the Train, a best-seller book that was mangled into an appallingly bad film when it had everything going for it to be turned into a box-office success. Yes, there are tremendous incentives to making films in Canada but they do have to be good films that people will pay money to actually go and see.  I really do wonder how bad the results from their film side would be without those Canadian incentives?
He has even admitted in an interview that they picked up Peppa as a kind of afterthought, without at all seeing the potential there was in the little porker. A fortunate accident, it seems.
For as long as Mr Film Canada is in charge, Entertainment One (LON:ETO) is likely to go nowhere.
I believe that major shareholders, notably Livermore, are fed up with the guy but he is allowed to stay.
Another case of poor management fouling up what could be a great business.

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ridavies 14th Jun '17 2 of 6
3

One of the issues in terms of the Value is that it was seen as a takeover target for ITV I think. Maybe that is still there in the minds of some people. The sharye price still seems to reflect that, either by ITV - unlikely - or someone else - dont know who! I have always distrusted companies like this for the very good reasons you mention - continuing high investment each and every year together with limited continuing value material. If the company cannot make money given the value of series properties like Peppa Pig, then when will it? Diversified, yes, but not when the rest continues to pull down the high value projects. In this way and this way only, it reminds me of French Connection where the unprofitable retail kills the profitable wholesale and the valuable overall name - it seems just in the FC case for the personal gratification of Mr Marks!

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Roland Head 14th Jun '17 3 of 6
1

In reply to post #193931

Hi ridavies,

I agree re. the ITV (LON:ITV) offer. Entertainment One (LON:ETO) shares are still trading at roughly the level of the ITV bid.

Indeed, my view on ITV's acquisition/studio led growth over the last few years is similar to my view on Entertainment One. I question the longevity of some of these assets, given the prices paid. But to be fair to ITV, it has managed to generate a useful amount of cash for shareholders along the way.

I'd not want to buy ITV or ETO at the moment. I think that both companies are heading into the tail end of the cycle and may offer better value in the future (perhaps).

Regards, Roland

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Soundbuy 14th Jun '17 4 of 6

Very thorough, appreciated.

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janebolacha 14th Jun '17 5 of 6
2

To add to my point about Peppa Pig needing to be spun off or sold off in order to realise the value in her, rather than that value being drowned within the other businesses of Entertainment One (LON:ETO) , all except Peppa Pig uniformly sluggish and under-performing, look at these figures ( in £m ) extracted from the last full year results:

http://www.stockopedia.com/share-prices/entertainment-one-LON:ETO/news/rns/170523eto9064f.htm/?title=full-year-results


Division                               Revenues         EBITDA      Inv. in content and production

Television                             452.7                62.8               260.2

Family (essentially PP)         88.6                 55.6                  5.1

Film                                       594.2                 52.7               142.6


Isn't it blindingly obvious which division is the golden goose?

Yet where have they been spending the money?

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Carey Blunt 15th Jun '17 6 of 6

I held for a long while mostly on the hopes of PP and the hint of potential takeovers but have sold recently. I agree that it's not going anywhere fast and holding just in case of a buy out is not something I want to do.

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 Are LON:ETO's fundamentals sound as an investment? Find out More »



About Roland Head

Roland Head

I'm a private investor, analyst and writer on stock markets, with a particular fondness for free cash flow, dividends and value. My main interests are UK and US stocks. I also have an interest in (profitable) commodity stocks.  I have passed the CFA Level 1 exam and hold the CFA UK Investment Management Certificate (IMC). One of my investment interests is developing rules-based strategies such as my Stock in Focus portfolio. This reflects a significant part of my personal portfolio and is the subject of my weekly column here at Stockopedia. In earlier life, I worked as an engineer in telecoms and IT. The rules-based and quantitative approach required for this kind of work undoubtedly influenced my investing style.  I also learned a lot from seeing the tech bubble deflate in 2000-1, when I was working for a very large and now defunct Canadian telecoms firm.  more »

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