The NMX5550 Media sector has performed well over the last 5 years, rising from 6000 to 8900 over that period. Today, I want to take a closer look at 3 of the constituents within this sector. Two of which have not made it onto my watchlist, and one of which has.
The Media sector itself, whilst rising in value, has been through a dry spell until recently. Following the rise from 6000 to 7500 in 2015, the price of this sector has been rangebound between 6500 – 8000 until mid 2018. It was only recently then that the sector began to really make that move to the new highs of 8900 that we see today.
But how have some of the stocks within this sector performed financially? And who would I be buying and staying clear of right now?
Today we take a closer look at 3x companies within the NMX5550 Media sector.
[INF] Informa plc
[INF] Informa plc are a FTSE 100 company specialising in events and publishing within the Media sector.
A look at their income statement shows that despite revenue being stagnant from 2008 to 2016, they have enjoyed a recent jump in turnover in 2017 and 2018, in line with the sectors overall improvement perhaps.
A rise from £1.27 billion to just £1.34 billion over years is rather flat. However, things have begun to change for [INF] Informa plc in 2017 when revenue jumped to £1.7 billion and then to £2.36 billion in 2018. So there’s definitely been some recent growth there.
Unfortunately, expenses are high for [INF] Informa plc. Sucking up around 85% of the gross profits on average year on year. In addition to this the interest of debt has always been high over the last 10 years. In 2008 this sat at 45% of the operating profit. In 2018 this was still as high a 25%. A marked improvement, but still causing a huge dent in net earnings when 25% of your profit goes on interest on debt alone.
Consistency is what i’m looking for in these companies operations, but in this instance it is not there. In 2014 net earnings came to -4.5% for instance. And the fall from 18.8% in 2017 to 8.9% in 2018 is clearly a sign of the numbers headed in the wrong direction.
Not an awful company by any means. But they lack the consistency i’m looking for, the interest on debt is far too high meaning they need to borrow vast amounts to achieve what they are trying to achieve, and expenses are consistently too high.
There are better companies for me to focus on right now.
[WPP] WPP Group plc
The world’s largest advertising company and public relations specialists are the next company I would like to take a swift look at.
With a revenue of £20.7 billion they are a far larger company than [INF] Informa plc. Yet their numbers look just as uninspiring to me.
Operating profit in 2007 was a healthy £1.6 billion. Yet 11 years later despite big growth in revenue (£12 billion in 2007 to £20 billion in 2018) the company are still only reporting operating profits of £1.9 billion.
This concerns me slightly. A closer looks shows the lack of growth being caused by the increased expenses and cost of sales which seem to be growing at the same rate as the revenue coming in. Resulting in a low operating cost growth.
Interest on debt has been high in the past. Some years extracting as much as 26.3% from the operating profit. We saw this drop to lows of 8.7% in 2016. However, the numbers are starting to creep up again, to 9.0% in 2017 and 12.9% in 2018. Suggesting [WPP] WPP Group are borrowing a fair bit in order to operate and achieve what they have managed to achieve.
Net earnings have been historically low since 2007. On average sitting at around 8% a year. Not very exciting.
However, my main concern here is the overall trend seen between 2015 and 2018. When the NMX5550 Media sector is performing well from 2018 onwards, we’ve seen movement in the other direction when it comes to WPP.
10.1% net earnings in 2015, 9.7% in 2016 and now in the last filed accounts of December 2018, net earnings had fallen to just 6.0%.
They filed better results, but part of my analysis always removes extraneous income sources. I am only interested in the underlying recurring revenue of the company. Not what they make from one off sales of assets and investments. I believe this provides a misleading figure.
Removal of these sales of assets shows us what’s happening underneath. And WPP numbers have been falling.
[RMV] RIghtmove plc
One company I am more excited about within the NMX5550 Media sector is [RMV] Rightmove plc.
Rightmove plc’s numbers look superb.
A huge gap in terms of size, Rightmove plc filed a revenue of just £267 million in December 2018. But it’s not so much how much they make that i’m interested in. It’s what they are doing with the revenue and how profitable the business is.
[RMV] Rightmove’s expenses are low, at only 25% each year. This has come down a lot from their highs of 40% back in 2008. In fact, year on year they have managed to reduce their expenses costs. This in the face of a consistently growing revenue.
Indeed, every single year revenue has risen. From lows of £74 million in 2008 to last years £267 million.
Revenue is rising whilst expenses are falling. This is superb.
It produces a strong operating profit growth.
They are also not borrowing anything. There’s no debt behind these results. They self finance everything. This means no deduction from their operating profit to pay for interest on debt. As there is no debt.
It leaves a hefty chunk in the net earnings.
In fact, net earnings have risen every single year since 2008. From lows of 34.4% to last years 59.9%.
In other words, after all the costs and expenses of running their business, [RMV] Rightmove plc are keeping hold of nearly 60% of all revenue as profit for their shareholders. I rarely see such impressive numbers.
Looking at the balance sheet, assets outweight liabilities well. In fact, liabilities are very low. They have very little in the way of overheads.
They have also been using their leftover profits to do three things I love seeing companies do.
- They are paying dividends
- They are buying back their own shares (reducing the number available and driving up demand/share prices)
- They are pumping money into reserves, now sitting at £11.1 million cash reserves.
For me, [RMV] Rightmove are the better of the 3x companies by far. They may be the smallest, but what they are doing with that revenue is fantastic and as a result i’m on the lookout for long signals on my mechanical systematic trend following approach.