I’ve always lamented the fact that Canada doesn’t have enough companies that are global leaders in what they do. Sure, there are a handful, like my personal favourites Enbridge or Nutrien, but smaller Canadian companies are generally not able to compete in an ever more complex world where scale and deep pockets can matter more than a good business model and competent executives running the show.
However, there is one distinctly Canadian media company that is small but packs a mighty punch on a global scale and is actually the undisputed leader in a very fast-growing business. That business is children’s media content, and the company is WildBrain (TSX:DHX.B)(NASDAQ:DHXM), formerly known as DHX Media.
I am a passionate advocate of investors looking at WildBrain closely, because the company has one of the biggest pure-play content libraries for children’s media at over 13,000 half-hours of “content gold.”
In addition, the company’s YouTube channel WildBrain Spark has over 109 million subscribers, which is going to be a powerful force for future earnings growth. Lastly, the company owns and operates four family entertainment channels that are among the most viewed in Canada.
Why hasn’t WildBrain been wildly successful and gone from strength to strength if it has so much going for it?
Huge debt and no path to monetization
The issue is simple. The company took on a lot of debt to acquire its world-famous brands like Peanuts and others that are money makers globally. But I believe the company lacked a clear vision on how to super-charge those assets to ensure the growth paid for the financing of the debt and much more.
Instead, the debt crippled the financials and created a situation where the company absolutely could not afford to make any execution missteps, and when it did falter, the market punished it severely, sending shares down from a high of $8 a few years ago to under $2 at time of writing.
Regardless of the bleak financial picture, there is absolutely no disputing the fact that the company is sitting on a treasure trove of assets that are known and beloved the world over. There are hundreds of millions of kids in Asia and Africa that know and recognize Snoopy and some of the other characters that WildBrain owns. The company is asset rich but cash poor, and that is not a great place to be, but it needs to focus on monetizing its assets.
What has the company done about its problems?
The biggest thing is that it has finally realized that it needs a seasoned senior executive who has “been there and done that” to take control of the ship and steer it to safety first and then good health slowly but surely. The new CEO Eric Ellenbogen is a veteran media executive who spent time at the top at Marvel before it got acquired by Disney.
Eric has made a few cultural changes around the shop that speak volumes to his intentions. The first is that he told the investor community that he is dialing down the constant barrage of media releases the company makes about every little piece of news. Previously, the company would make a small licensing deal in China for one of its media assets and plaster that all over the news outlets.
While that type of publicity is enticing, the reality is that it can also set up false expectations for investors who think China licensing means multi-million-dollar contracts immediately and then punish the company’s stock when its outlandish expectations don’t meet reality.
In addition to that smart move, the company also announced that it was increasing its budget for creative development because good content can be monetized a thousand times easier than bad content that becomes a money pit because no one wants to license it. The company also mentioned that it would strive to appeal to top creative talent by sharing the profits with those talented people who help build the new media offerings.
Foolish bottom line
WildBrain is trading at under $2 per share, and some industry veterans have said that the current media library alone is worth far more than that price. This means that the current stock price is trading at a substantial discount to its book value and represents a phenomenal opportunity to double the money of investors that are willing to take a calculated risk.
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Fool contributor Rahim Bhayani owns shares of Enbridge. David Gardner owns shares of Walt Disney. The Motley Fool owns shares of and recommends Enbridge and Walt Disney. The Motley Fool recommends DHX Media and Nutrien Ltd and recommends the following options: long January 2021 $60 calls on Walt Disney and short January 2020 $130 calls on Walt Disney.
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