Off-market Acquisitions Of Music Catalogs Will Diversify Assets And Boost Future Income Streams

Key Takeaways

• Strategic catalog acquisitions and industry relationships are expected to enhance revenue, with off-market deals aiding portfolio diversification and margin improvement.
  
• Revenue growth is bolstered by increased streaming prices, while operational efficiency contributes to strong earnings and margin expansion.
  
• Reliance on off-market deals and M&A unpredictability could impact growth strategy, affecting long-term revenue and earnings.

Catalysts

Operates as a music publishing company.

• Reservoir Media's strategic focus on acquiring high-quality music catalogs, including those with evergreen hits and innovative sampling potential, is likely to drive future revenue growth as these assets continue to generate income.
  
• The company's ability to execute off-market deals through extensive industry relationships is expected to facilitate further portfolio diversification and revenue expansion over time, impacting both the top line and improved net margins.
  
• Increasing music publishing and recorded music revenues, driven by price increases at major streaming services, suggests an upward trajectory in ongoing revenue streams.
  
• Operational efficiency and cost control measures have led to strong adjusted EBITDA growth, which could contribute to enhanced net margins and earnings in future quarters.
  
• Robust pipeline of M&A opportunities with off-market deals implies continuous scale expansion, potentially leading to long-term revenue and earnings growth.

Reservoir Media Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Reservoir Media's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.0% today to 12.7% in 3 years time.
• Analysts expect earnings to reach $23.7 million (and earnings per share of $0.33) by about March 2028, up from $7.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 50.1x on those 2028 earnings, down from 60.9x today. This future PE is greater than the current PE for the US Entertainment industry at 26.0x.
• Analysts expect the number of shares outstanding to grow by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.09%, as per the Simply Wall St company report.

Reservoir Media Future Earnings Per Share Growth

Risks

• The reliance on off-market deals and the potential unpredictability in M&A could affect Reservoir Media’s growth strategy, impacting long-term revenue streams and net earnings.
  
• Increasing administrative expenses related to higher compensation for artist managers could pressure net margins despite rising revenues.
  
• The rise in interest expenses driven by increased borrowings and effective interest rates could impact net income as the company pursues M&A activities.
  
• Potential non-recurring revenue sources, like royalty recoveries and retroactive cleanups, suggest volatility in revenue, which may not sustain continued growth in the long term.
  
• Exposure to variable interest rates with under 50% of total debt hedged may present financial risk and affect future net earnings amidst uncertain interest rate environments.

Valuation

• The analysts have a consensus price target of $13.5 for Reservoir Media based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $12.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $186.7 million, earnings will come to $23.7 million, and it would be trading on a PE ratio of 50.1x, assuming you use a discount rate of 10.1%.
• Given the current share price of $7.35, the analyst price target of $13.5 is 45.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.