Saturday, 30 March 2013

Glacier Media 2012 Fourth Quarter Update

Glacier Media recently reported results for 2012.  While sales were up significantly, increasing 23.4%, cash flows from operations, the company's preferred gauge of profitability, were flat from the earlier year, at about $44 million.  More importantly, though, the company required virtually no tangible equity to generate these cash flows, the mark of a dominant business.  The somewhat soft results were due to weakness in national advertising, sluggish economic growth in the important B.C. market, and mediocre performance in the assets acquired from Postmedia near the end of 2011, as well as increased investments that are likely to result in stronger earnings in the future.

On a happier note, business and trade publications performed well, and management is making energetic efforts to increase the "decision dependence" of those assets: the more businesspeople rely on the information, data and analytics these publications provide, the higher Glacier Media's cash flows will be.
In the area of capital allocation, the company pursued its usual balance between investing in its own operations, making acquisitions, paying down debt, funding the dividend and repurchasing shares.  Unlike in most years, when capital expenditures tend to range from $2-5 million, Glacier spent around $15 million, mostly on a printing press, a one-time expense that will both increase revenues and decrease costs.  However, sustaining capex was a paltry $2 million, though that figure may rise somewhat in the years to come after the elevated spending in 2012.  Perhaps the sound and responsible capital allocation is because management is relying on share/dividend returns for their own wellbeing: after all, just $4.5 million was spent on wages for all directors, senior executives and divisional managers, a refreshing difference from what generally prevails in the corporate world.
Despite a lackluster year, Glacier Media remains a compelling investment.  The share price stands at about $1.90, and net debt is $1.42 per share, meaning the company's enterprise value is $3.32.  Even assuming only modest organic growth, the company is likely to generate $0.45-0.55 in free cash flow per year over the next few years.  Buying stock in a company that generates $0.50 in free cash flow and costs $3.32 is the equivalent of buying a bond that yields 15%.  However, this particular arrangement is better still.  In theory, Glacier Media could retire debt in about three years, and pay all of its FCF out as a dividend in the ensuing years.  If it did so - it won't, but it could, and all other capital allocation decisions should be weighed against this alternative - shareholders would be buying the equivalent of a bond that yields nothing for the first three years, but beginning in year four yields a staggering 29% ($0.55/1.90) with the coupon likely to grow modestly over time.  Not bad for a bond.
Disclosure: At the time this article was published, the writer was long GVC stock.

Here is my Investment Analysis of Glacier Media.

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