While there are many measures of valuation, a price-to-earnings ratio (or P/E ratio) is probably the most well-known.
It's a real bang for your buck ratio, comparing a company's share price to its earnings per share - basically, helping you to assess its value compared to similar companies or a benchmark.
A low P/E ratio usually indicates a company is cheap, while a high P/E ratio indicates it is expensive.
As effective as P/E ratios are, they don't tell the whole story and sometimes companies trading on a low P/E can have serious flaws. Some discounted stocks are cheap for a reason, others present attractive buying opportunities at bargain prices.
One of the key ways to separate the wheat from the chaff is to look at management. Companies with stellar management teams - those who have the drive and business acumen to take a company to the next level - are more likely to be the darlings you are looking for.
So in this episode, Livewire's Ally Selby was joined by Tyndall Asset Management's Jason Kim and Forager Funds Management's Steve Johnson for their analysis of three low P/E stocks with top-notch management teams.
Plus, they also each named one stock that they would be buying right now.
Note: This episode was filmed on Wednesday 15 November 2023. You can watch the video or read an edited transcript below.
Ally Selby: Hey, how are you doing? And welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today we're going to be taking a look at five low P/E stocks with top-notch management teams. To do that, we're joined by Jason Kim from Tyndall Asset Management and Steve Johnson from Forager Funds Management.
First up today, we have Nine Entertainment. It boasts Peter Costello as its chair and Mike Sneesby as its CEO, who formerly led Nine's video-on-demand business. Jason, I'm going to start with you today. Is it a buy, hold or sell?
Jason Kim (BUY): It's a buy for us. It's no longer the structurally challenge business it was many years ago. Have a look at the breakup of its valuation. We believe it's worth basically $2.50, and it's trading below $2. A third of its business is its holding in Domain (ASX: DHG), which is a great business. You add in Stan, it's a growing business, quite profitable. You get to half of its value there already. You look at its TV business, it's free-to-air, it's arguably the challenge bit, but it's starting to get offset by its BVOD business, 9Now, in particular - where it gets really good ad revenue because it's highly targeted viewing. As a result, overall we see this business doing quite well, and at $2 or thereabouts, it's very cheap.
Ally Selby: It's been a volatile ride for shareholders over the past year. It has beat the market though - its share price is up 7%, Steve, over to you. Is it a buy, hold, or sell?
Steve Johnson (HOLD): It's a hold for me, Ally. I really, really like what they've done with the business here. I think the vertical integration across radio, TV, newspaper sites, and the way they can now cross-market and share resources like news across those different platforms is working really, really well. I think it is the model for the industry to work towards. You can't buy it without Domain, though. It's attached to Domain and Domain is a huge part of the valuation. I'm less excited about the valuation of that piece of the business. So, I actually like the bit that everyone else doesn't like here, and if I could buy it on its own, I would buy it. But I've got a stock to talk about later that's a bit purer exposure to that, that has an even lower multiple, so we'll save that for later.
Ally Selby: Next up we have Nick Scali. It was founded in 1962 by Nick Scali himself and is now run by his son, Anthony Scali. Steve, staying with you, is it a buy, hold or sell?
Steve Johnson (HOLD): It's a hold for me, Ally. We have this stock on our watch list and it's quite clear that we've missed two very good opportunities to buy it in the past couple of years. Maybe too greedy is the answer to that. I love the management team, I love the business. I still think that there is a lot of margin retraction to come here for Nick Scali. It probably should go back to pre-COVID levels of margins and I think there's just a little bit too much optimism still in the price for me now, but I want to own it.
Ally Selby: Retail has definitely been on the nose this year, but since hitting a low in June, Nick Scali's share price has rebounded a whopping 41%. Jason, over to you, is it a buy, hold, or sell?
Jason Kim (HOLD): It's a hold for us as well. It's a great business, with a great management team. They made a great acquisition not that long ago, but you have to go against the cycle to do well and it's going to be very tough. And the other thing that holds us back as well, besides the cycle for the consumer, is that it would appear they might be looking to make offshore acquisitions and that's tough. But given the quality of the business, it's a hold.
Ally Selby: Last up today we have SkyCity Entertainment. It's about to lose its CEO amid greater regulatory scrutiny. Why does SkyCity deserve a place on this list and is it a buy, hold, or sell?
Jason Kim (BUY): It's a buy and that's a great question, Ally. SkyCity has had a lot of challenges over the last several years, most of them beyond their control. The management team has done a great job over the last few years. So, if we look at what's held it back, it's been a combination of light rail infrastructure that's been built around its key casino in Auckland, it's had the International Convention Centre that caught on fire. We had COVID and more recently had regulatory scrutiny, which arguably is partially their fault, but certainly, the whole casino industry has faced that. That said, we look at it right now and it's trading at 10 times earnings. When we look ahead, it has a new hotel popping up, and the International Convention Centre will be opening up as well. It's currently trading at an EBITDA not too far away from pre-COVID. With those two new things coming on board, you can see that EBITDA growing tremendously and once we get over this regulatory uncertainty, it should be at least a market multiple stock. So, we see significant upside from here.
Ally Selby: It's definitely been a painful month for shareholders. After announcing that its New Zealand licence could be suspended, it lost around $390 million in value. Over to you, Steve. Is it a buy, hold, or sell?
Steve Johnson (HOLD): It is a hold for me, Ally. We've owned stocks in this space. We owned Crown before it got taken over, we owned Star (ASX: SGR), and we actually owned SkyCity out of COVID as well. So, it's not a space that we're unwilling to invest in. Those other two experiences for us though have me thinking that there probably is bad news to come out of this review. There will be real financial consequences for SkyCity. What I like about it is it's got less competitive threats than those Australian casinos have. You've got two right next to each other here in Sydney now - SkyCity doesn't have that problem. The one other issue I've got with the industry is I think the younger generation all have a potential casino on their phone. The actual casino part of these assets is going to get more and more difficult, but the entertainment piece is quite interesting - the infrastructure, the hotels - you can put some pretty attractive numbers on some of those assets without even needing the casino to be there. So, it's getting closer and closer to an attractive price, in my opinion.
Ally Selby: We asked our guests to bring along a low P/E stock with an impressive management team. Steve, what did you bring for us?
Steve Johnson (BUY): Seven West Media - and this will be a controversial one. This stock is trading at less than three times earnings. You have a management team, I think, that is doing a very good job of navigating a very difficult environment. Some of those themes we talked about earlier are playing out at Seven West as well. They actually have market leadership in free-to-air TV. There are a lot of eyeballs moving to BVOD and what's interesting about that is that they can target you much more personally with the BVOD advertising than they can with free-to-air TV. We think you'll get multiples of dollars per eyeball in that world than you get in the free-to-air one, but it's going to shrink. Our assumption here is this business is going to shrink. We need a really good management team to allocate capital well here and not waste it on other things because they're in charge of a shrinking business. But at three times earnings, I think you've got a management team that's going to do well for you over time.
Ally Selby: Over to you Jason. What's your low P/E stock with an awesome management team and why?
Jason Kim (BUY): QBE Insurance. It's trading at below 10 times earnings. The current CEO, Andrew Horton, has a great track record at Beazley where he worked before. At the moment, we're seeing insurance premium rates going up at more than double digits for quite some time and will continue to do so. We're seeing interest rates more elevated. For a long time, the market thought that interest rates would be around zero forever, but clearly not. And where we are right now is probably the more normal number going forward. So, the combination of higher premium rates (high interest rates generate more investment income) and we may see, fingers crossed, normalisation in claims as we head towards an El Nino, which arguably is actually more favourable for insurers. So given all that, we see significant upside for QBE. It's currently around $15 a share. This time next year could be well above $20.
Ally Selby: Well, that's all we had time for today. I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content just like this every single week.
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