Magazine group Future (LSE:FUTR) reported earnings on Thursday (7 December), and the response was conclusively negative. The shares fell by more than 30%, before recovering a little, as investors reacted to disappointing results. So with such a dramatic collapse in the share price, is this now a major opportunity? Or is there more pain ahead?
How bad was it?
I hold Future shares and I know that volatility isn’t a new feature after its earnings. In the last year, the share price has fallen by over 50%. That has come with questions around the future of magazines and whether the company has a sustainable strategy.
The results weren’t great. Profits before tax were down by 19% year on year, to £138.1m for the year to September 30. Revenues dropped 10% to £788.9m, mostly due to a larger drop in US sales and advertising revenue.
Obviously these figures are disappointing, but I think such a share price collapse would have come with a much larger miss. Often such a drop can be attributed to a change in forward-looking guidance, but the company expressed confidence in returning to revenue growth in the second half of 2024, forecasting low single-digit growth for the full year.
Can the company turn it around?
The media space is obviously in a major transition period, as AI and the post-pandemic mindset see the way we entertain and inform ourselves evolving. However, the company seems to be taking a proactive approach.
Future has announced a £25m-£30m investment programme over two years, aiming for an adjusted operating margin of 28%-30%. It also plans to hire 200 new staff, with 150 in editorial roles, focusing on reviews and video content. I like the sound of this. Clearly there will be bumps in the road, but with the firm aiming to build on its specialities, and invest heavily in the right areas, the future could well be bright.
What about the valuation?
With the share price now close to £6, a discounted cash flow calculation suggests that there’s a tremendous opportunity for patient investors, with a fair value calculated to be £30.51. Not that the stock may ever reach that level, of course.
But at a price-to-earnings (P/E) ratio of 6.5 times, the company is notably cheaper than competitors, with the average of the sector at 10.6 times. Clearly things need to improve in terms of investor sentiment (and performance), but I think that sooner or later the company could start to represent a real bargain.
A bargain despite the risks?
Of course, when a company’s share price falls so sharply, there are clearly concerns. Many investors likely suspect that the turnaround efforts will be unsuccessful, and that the calculated valuation is far too optimistic. However, with many companies in the FTSE 250 experiencing similar levels of uncertainty and volatility, I don’t put all the blame on the Future management team.
I’m in the camp that thinks the issues noted in this earnings report are well understood by the company, and short-term in nature. As a long-term investor, I love seeing opportunities for picking up quality companies at a major discount, so I’ll be picking up more shares at the next opportunity.
