Stay away from Stingray Group stock, this investor says

Music and media company Stingray Group (Stingray Group Stock Quote, Chart, News TSX:RAY.A) has slid a tonne over the past year but promising quarterly results have the stock jumping.

Is this a name poised for more growth? Not too likely, says investment analyst Ryan Modesto, who claims that patient investors may be rewarded with Stingray but the stock is not going anywhere anytime soon.

Montreal-based Stingray, which offers music playback channels on cable TV, owns a slate of radio stations along with other interests, announced its first quarter fiscal 2020 results last Wednesday, with revenues jumping 133.4 per cent to $80.4 million, in large part due to recent acquisitions Newfoundland Capital Corporation and Novramedia.

The company’s adjusted net earnings excluding one-time items also shot up to $15.8 million versus $5.9 million a year ago or 21 cents per share, while the company reported adjusted EBITDA of $31.2 per cent, up 178.8 per cent year-over-year with a 38.7-per-cent margin. Stingray’s numbers met with analysts’ expectations which called for $80.8 million in revenue and adjusted EPS of 21 cents per share.

“We are thrilled by our first quarter results with several key financial metrics achieving record levels. Most noteworthy is our adjusted free cash flow of $20.6 million, up by a robust 229 per cent over last year,” said Eric Boyko, President, CEO, and co-founder, in a press release.

“Our acquisition thesis for NCC was largely supported by its capacity to generate solid free cash flow and this quarter’s results underline that potential. Broadcast and Commercial Music also performed very well with a significant improvement in the adjusted EBITDA margin,” Boyko said.

Stingray Group stock spiked on Q1 news

The market certainly liked the quarter —the stock is up almost 14 per cent since the Q1 release, pushing RAY.A into the black for the year so far.

But Modesto, CEO of 5i Research, says that a company like Stingray is going to have a hard time growing, since the radio industry is itself in a state of decline.

“The industry they’re in is slower growth because everyone is moving to the Spotify model and they’re not listening to radio as much and the advertising in the radio industry is falling,” said Modesto to BNN Bloomberg last Thursday. “So this company is going around buying radio stations and radio-type companies and they have some tech pieces as well — they have a karaoke business that you can play through TV.”

“They do it at low valuations and they recoup the cash flows and reinvest them. So, it’s an interesting company in terms of that value consolidator industry but it is slow growth,” he says.

Stingray’s big splash came last October when it purchased Newfoundland Capital for $506 million, including $112 million in debt. NCC owns 101 broadcast licenses including 72 radio stations and 29 repeating signals.

“A case can be made for it but if we were going to be interested in it we’d really want to see some momentum come back to the name,” says Modesto. “But we think that they’ll continue to do what they do in buying up companies at probably pretty attractive valuations and reinvest those cash flows over time and probably increase their dividend.”

With the quarterly release, Stingray announced a 7.7 per cent increase to its dividend which currently sits at a yield of 3.86 per cent.