This week he looks at HMV Group.
Paul McCartney once summed up what has been happening in the entertainment industry when he sang ‘In this ever changing world in which we live in.’
It may not be good English, but it suggests the leap from making our own compilation tapes and playing basic tennis on the TV screen to iPods, which store games and as much music as you want.
Changes like this should be great retail opportunities – there is hardware, games and music to sell. The only problem is the internet and the opportunity to consume content without paying for it.
In the UK it is estimated that the illegal download market is about 20 times bigger than the music market, including CDs.
That is a lot of money that retailers, the music industry, artists and the Government are missing out on. Recent press comment has hinted that Lord Mandelson might try to recruit internet service providers to join the war against the illegal downloaders by potentially blocking their web use.
One firm exposed to these trends is HMV. Under chief executive Simon Fox it has moved into running live venues by entering a partnership with music group Mama. Bands now make more money by performing than selling CDs.
It also has a joint venture with Curzon, which is using the space above shops as cinemas. And there is a partnership with mobile phone firm Orange.
The demise of the old Virgin megastores and Woolworths presents a great opportunity and recent results show this is being grasped. Digital music is here to stay and even The Beatles joined the party last week with the release of their digitally remastered albums.
Paid-for downloads are currently 15% of the music market and increasing. HMV has just announced the acquisition of 50% of online music store 7digital to increase its expertise in this market.
The company still has to restore growth at its Waterstone’s bookstores and work out how it is going to deal with the threat from electronic books. In addition the last overseas business, in Canada, does not have anywhere near the dominant position of the UK side and a solution needs to be found.
Hedge funds have come to the conclusion that HMV will struggle and interest in shortselling the shares is among the highest in the London market.
Consumer spending will come under pressure as taxes rise next year, but I think this is reflected in a price-to-earnings ratio of less than nine times in the year to next April. The shares also yield more than 6% on a dividend that’s covered 1.5 times by earnings.
There are structural challenges ahead for HMV, but that is true for most media companies. I am backing Fox and his team to successfully navigate us through these tougher times.
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