With three disappointing quarters in a row, Byron Capital analyst Rob Goff says Mood Media (TSX:MM) has become a “show me” stock. In a research update to clients yesterday, Goff lowered his one-year target price on the company to $2.10, from his previous $4.50. The Byron Capital analyst is maintaining his BUY rating.
Last week, Mood Media reported its fiscal 2012 results. On the back of several recent acquisitions, the company’s topline keeps growing, but so are its losses. Mood Media lost $79.23-million on revenue of $443.8-million, up from a loss of $59.90-million and revenue of $274.7-million a year prior.
Goff says he is concerned by the delay in Mood Media profitably transitioning its legacy audio business into customers on the video side. The company, he notes, pointed to an contracted backlog of 4400 visual sites and an addressable prospects list of 10,000 more. Its European visual penetration is now at more than 10% of its clients and about 25% of its revenue, illustrating how lucrative the business can be. Goff believes there is a “substantial” opportunity to leverage visual know-how into mood Media’s U.S. audio customers, and that just 5% of of North American clients moving to visual would add about $0.70 share, based on an equity multiple of 6.0x EBITDA.
In May of 2011, Toronto-based Mood Media (which was previously known as Fluid Music Canada) sprung to public attention when it completed the $345 million acquisition of Muzak, forming an entity that had $400 million in revenue in what is referred to as the sensory branding space, a term for multi-sensory marketing tactics now being used by giants such as Nissan, Pizza Hut and Starbucks. The company has inked deals with brands as diverse as Vitamin Shoppe, Hooter’s and the Puma store in Paris, where the company installed giant video walls.
Goff says Mood Media’s tough Q4 did have a silver lining. He says visual additions were 4,196, far ahead of Q3’s 1,380. He says this key performance indicator was obscured by the upfront equipment margin pressure and content cost outlays that hurt ultimately hurt financials, but does clearly show that Mood Media is having success transitioning from its legacy audio business, if not yet profitably.
At press time, shares of Mood Media were down 9% to $1.01.