RBC RBC Dominion Securities analyst Drew McReynolds is becoming “incrementally more positive” on the Canadian media sector, expecting first-quarter 2024 financial results to show sequential improvement following a challenging 2023.
“As 2024 progresses, we expect accelerating earnings growth driven by a gradual improvement in the operating environments (economy, advertising, content demand) and easier year-over-year comps. Valuation-wise, we continue to believe most FTM [forward 12-month] EV/EBITDA valuations provide attractive entry points assuming an economic hard landing is avoided. Our best ideas are VerticalScope, Cineplex and Transcontinental.”
In a research report released Tuesday, Mr. McReynolds predicted accelerating earnings growth will likely drive better stock performance at current valuations.
“Year-to-date, roughly half of the stocks in our broader media coverage are performing in line or better than the 5-per-cent total return for the S&P/TSX Composite with VerticalScope (up 60 per cent) and Stingray (up 20 per cent) leading the way. Following a relatively dismal 2022 and 2023 for most stocks in our media coverage, we believe improving stock performance should prove sustainable provided an economic hard landing is avoided in North America concurrent with a gradual strengthening of the advertising market that appears underway. While most content and distribution companies (WildBrain, Boat Rocker, Corus, Cineplex) have yet to fully recover from the lingering impacts of U.S. guild strikes in 2023, we expect 2024 to be a year of gradual normalization with the stocks eventually benefiting from a full earnings recovery in 2025.”
The analyst warned “visibility around the strength and sustainability of any advertising recovery remains limited reflecting a still-choppy Canadian advertising market as lingering macro uncertainty, inflation and shifts in consumer spending continue to impact a variety of advertising categories and overall advertising spend.” However, he thinks recent management commentary has pointed to the fourth quarter of fiscal 2023 has the likely trough for advertising “with early signs of a recovery emerging in Q1/24.”
For his top picks, his targets are:
* VerticalScope Holdings Inc. ( “outperform”) at $14. Average: $10.68.
Analyst: “VerticalScope’s earnings have not been immune to macro and digital advertising headwinds that emerged in 2023. We continue to believe the pullback in the shares this cycle more than reflects the earnings impacts with sequential improvement in operating and financial performance now fully underway. Although some patience may still be required pending a more notable and sustained improvement in macro visibility, we believe such sequential improvement is likely to accelerate through 2024. Against this improving backdrop, we believe current valuation levels represent one of the most attractive buying opportunities in our coverage given solid execution, new product traction, accretive tuck-in M&A potential, and a highly profitable and FCF generative business model.”