Shares in production company Entertainment One (LSE: ETO) are trading lower today after the firm announced that one of its offerings, Designated Survivor, will no longer feature on ABC past the current series.
Management is talking with other parties who might be interested in the format, but there’s no guarantee another channel will make an offer. The cancellation is not expected to have an impact on this year earnings, but it is likely to hit the next fiscal period.
However, despite this setback, I’m still positive on the outlook for the company.
Look past the income
As I have covered before, I believe that Entertainment One’s real value is to be found on the group’s balance sheet, specifically, the value of its content library.
At the end of March 2017, an independent evaluation put the value of this asset at $1.7bn, or around £1.3bn. At the time of writing, the firm’s market value is just £1.32bn, which implies (if the value of the content library is stripped out) there’s no value on Entertainment One’s future income stream. With this being the case, it’s clear to me that shares in the content company are a steal today.
As my Foolish colleague Royston Wild pointed out at the beginning of last month, Entertainment One’s Peppa Pig franchise has continued to drive growth at the group with earnings in its Family division predicted to have risen 50% year-on-year for the fiscal year to the end of March.
Based on management’s upbeat forecast, City analysts are forecasting that Entertainment One will report earnings growth of 19% in the year ended March, followed by an expansion of 14% in fiscal 2019, which more than justifies the stock’s current forward P/E of 14.
Looking on these numbers and considering the hidden value in the group’s content portfolio, I believe shares in Entertainment One seem too cheap to pass up at current prices.
Another stock that looks to me to offer hidden value is Just (LSE: JUST). The investment case for this insurance and financial services group is simple… the shares are dirt cheap.
On every single metric, the company looks undervalued. It’s trading at a price-to-book value of 0.8 and an enterprise-to-earnings, before interest tax depreciation and amortisation value (EV/EBITDA), of 3.4. For some comparison, the market median EV/EBITDA ratio is 11.4! The forward price to earnings ratio is 8.6.
On all metrics, the company looks undervalued by around 50% compared to the broader market, that is apart from dividend yield, where 2.8% is below the market average. Still, as the dividend is covered four times by earnings per share, there’s plenty of scope for management to hike the payout further as earnings grow.
Unfortunately, earnings growth is not set to be the group’s strong point. Analysts have pencilled in a fall in earnings per share of 16% in 2018, but growth is expected to return in 2019 with net income rising by 11%.
In my opinion, this bad news is already factored into the stock. What’s not factored in, however, is any possibility of good news. And I believe if the company does perform better than expected, shares in Just could leap substantially higher.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.