Shares of Daily Mail & General Trust (LSE: DMGT) are trading 2% down at 633p after the media group released a trading update today for its financial year ended 30 September.
It said conditions remain “challenging” for some businesses in the group but advised: “The outlook for the Group as a whole is in line with market expectations, with adjusted earnings per share towards the higher end of the range and adjusted profit before tax towards the lower end of the range.”
Major changes
DMGT has recently undergone management changes with a new chief executive and finance director. One of the first major things the company did under the new CEO was reduce its 67% stake in fellow mid-cap listed media group Euromoney Institutional Investor (LSE: ERM) to 49%.
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Euromoney will cease to be a subsidiary and will be accounted for as an associate. However, the change is more than a paper exercise and the tangible benefits of it for both companies are part of the reason I reckon they could be brilliant turnaround stocks from the levels they’re currently trading at.
De-ratings
Before coming to their turnaround prospects, the tables below show where the two companies are at today, compared with their last share-price highs of February 2014.
| DMGT | Share price | Earnings per share | Dividend per share | Earnings multiple | Dividend yield |
| February 2014 | 1,073p | 55.7p | 20.4p | 19.3x | 1.9% |
| Today | 633p | 52p | 22.8p | 12.2x | 3.6% |
| Difference | -41% | -7% | +12% | -7.1 | +1.7 |
| EUROMONEY | Share price | Earnings per share | Dividend per share | Earnings multiple | Dividend yield |
| February 2014 | 1,385p | 71p | 23p | 19.5x | 1.7% |
| Today | 1,160p | 74p | 28p | 15.7x | 2.4% |
| Difference | -16% | +4% | +22% | -3.8 | +0.7 |
As you can see, the market has de-rated both companies. DMGT’s earnings per share (EPS) has declined 7% but its share price has dropped a massive 41%. As a result, the multiple of 19.3 times earnings investors were paying back in 2014 has dropped to just 12.2 times for investors buying today. Meanwhile, the combination of the falling share price and the increasing dividend (still well covered by earnings) means the yield has risen from 1.9% to 3.6%. It’s a similar story, only less pronounced, for Euromoney.
Turnaround prospects
I believe both companies have prospects of delivering good earnings growth in the coming years. If so, share price rises will almost certainly be given an extra boost by the market affording the companies higher earnings multiples. Even if the multiples don’t reach the previous 19-odd levels, a re-rating could still add significantly to the gains.
The reduction of DMGT’s stake in Euromoney means the latter’s balance sheet is now independent of DMGT’s. This has increased Euromoney’s financial flexibility to be acquisitive and add to its already well-respected brands and high-quality stream of recurring subscription revenues.
At the same time, DMGT has been able to reduce net debt from the proceeds of the share sale, likewise increasing its financial flexibility. This will help it pursue its strategy of allocating capital investment in market-leading positions, both organically and through acquisitions.
Both companies have good management in my view and look well capable of executing on what also appear to me to be sound strategies. On the basis of reinvigorated earnings growth and rising earnings multiples if this plays out, I rate both stocks as very buyable.
