Seven West Media

Reading last year’s Seven West Media annual report leads one to a few subjective conclusions. Most pressingly is that there seems insufficient recognition—at least in its communication with shareholders—of the structural threats facing all of its major business operations. Management refers to a ‘challenging market’ and ‘difficult trading conditions’ when discussing the results. But there’s no real discussion of the very real structural headwinds faced by the various forms of media in its portfolio—particularly newspaper and magazine publishing but also, increasingly it seems, broadcast television. With very few exceptions globally, ‘old media’ businesses that make a living from advertising are facing declining revenues and earnings. Earnings before interest and tax for all three of Seven West’s divisions fell, not that you'll see it spelled out in the glossy part of the annual report. For the record, in the year ended 30 June 2012, EBIT from television fell 15% to $291m, EBIT from newspapers fell 17% to $116m and EBIT from magazines fell 9% to $40m. On a pro-forma basis (ie, assuming that West Australian Newspaper Holdings and Seven Media Group were already merged for the entire preceding period), overall group EBIT fell 14% to $473m.

We also remain puzzled by the appointment of Don Voelte as CEO last year, unless the company is about to start drilling for oil (the former Woodside chief is a lifelong oil man). Appointing an industry outsider only makes any sense if a jolting shakeup is on the cards but there's scant evidence of that happening. And does anyone else remember when former Brambles chief John Fletcher was appointed to run Coles, and how that went? What about when fellow media company Fairfax appointed international rugby playing/political assistant/paper industry marketer David Kirk? Or the professor/academic/management consultant that preceded him? There’s risk when management is sourced from outside their core expertise.

It could be that the downturn is entirely cyclical in nature, in which case buying the stock on a forecast 2013 price earnings ratio of 10 might make sense. But we’ve got our doubts. And if, like us, you have concerns about the business’s structural future, about management’s ability to face problems head on, and whether perfectly attuned management would conquer the problems anyway, then the stock price isn’t yet cheap enough to compensate. AVOID.