Healthy scepticism is the best strategy over the long term
Stock investors should always look to remain positive because the market has a history of outperforming other asset classes.
The struggling free-to-air network has polarised top stockbroking analysts. The lowest valuation is 20¢ while the highest is 38¢. Meanwhile, investors have plumped for a price near the middle of the valuation range at 30¢, down from 39¢ in just a month.
The problem analysts face is that Ten's profits are so depressed in 2013 their valuations have to be based on the 2014 and 2015 earnings. These forecasts will depend heavily on two factors - the new management's ability to lift viewer ratings from the current disappointing 22 per cent and the strength of a recovery in the free-to-air advertising market.
There is an elevated chance the management can increase ratings but there are serious doubts that free-to-air, with the onset of new media platforms, can mirror the rebound of previous cycles.
At 30¢ a share, Ten is valued at $770 million with no debt. In 2014, the company is forecast to earn somewhere between $60 million and $80 million before interest and tax (EBIT). This means it will still be trading on somewhere between a 9.5 and 13 times EBIT multiple, hardly a bargain.
Last week we talked about whether it was time to re-enter the mining and mining service companies. The conclusion was that small miners and, moreover, mining service plays, were difficult investments because of their lack of transparency and liquidity.
Little did we know that recently floated Calibre Group and Ausdrill would oblige by downgrading earnings, highlighting how difficult the mining service industry can be.
Last week Calibre slashed its earnings forecasts. The story was less about revenue and more about serious margin compression.
Before the downgrade, Calibre was printing earnings before interest, tax, depreciation and amortisation (EBITDA) margins of about 11 per cent. In the current half that number will decrease to about 5 per cent.
Based on the revised earnings, Calibre is trading on an EBITDA multiple of seven times. Even after the huge slump in its share price after the earnings downgrade, it looks expensive.
For the plethora of service companies, the concentration
of large customers is a big deficiency and investors would
be wise to stay away from the industry, with the prospect of more downgrades and company collapses to come.
The standards group has been one of the worst performers on the market since the middle of 2012, following multiple earnings downgrades. The stock, though, has kicked 15 per cent in the past three weeks, with the company confirming its full-year guidance of EBITDA of between $100 million and $105 million.
Institutional investors that concentrate on small companies have always rated SAI highly because of its robust business model and growth prospects.
But the company has proved anything but consistent, with volatile earnings and disappointing returns.
In most of its presentations, SAI has emphasised its revenue and earnings-per-share growth but in reality it has increased debt to acquire businesses, only to see the overall return on assets drop from about 17 per cent in 2006 to the current level of 10 to 11 per cent.
In other words, for every dollar of capital invested in the business the return has slumped from 17¢ to just 10¢. Investors should monitor the company closely to see if it can reverse the disturbing decline in returns over the past five years.
Fairfax Media takes no responsibility for stock recommendations.