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Shares of my favorite foreign telecom giant, Grupo Televisa (NYSE: TV), have plunged more than 30% since mid-July.
The selling was sparked by a weak second-quarter earnings report in which the largest media company in Latin America said net income declined 34% year over year and earnings missed the mark by more than 50%.
What's more, the company's has been losing market share to competitors over the past two years.
Yet, I think now is the perfect time to take a long position, as I see three bullish catalysts on the horizon.
Earnings Pain Appears Temporary
Investors' stampede for the exits following the second-quarter earnings miss looks to be a gross overreaction. That's because the weakness largely resulted from temporary factors.
Advertising sales were down 16%, but they faced a tough comparison as the year-ago quarter included the World Cup. Sales also suffered thanks to a government requirement to host free political advertising ahead of the elections during the quarter. Despite this, overall revenue was up 8.5% year over year, and the satellite business posted strong subscriber growth.
The company is expected to report third-quarter earnings of $0.27 per share on Thursday.
Last year, Grupo Televisa reported a Q3 loss of $0.02 per share after booking a one-time charge for selling Mexican wireless operator Grupo Iusacell. With the factors weighing down Q2 2015 earnings behind it and a much easier year-over-year comparison, I think earnings will impress.
Less Market Share is Actually a Good Thing
Grupo Televisa is the largest media company in Latin America with pay and satellite channels in Latin America, North America, Asia and Europe. The company owns four pay TV companies and licenses its content to other carriers. It also controls more than half of the Mexican satellite market through its ownership of Sky Television, a joint venture with Direct TV.
As I mentioned above, Grupo Televisa has been losing market share. Between September 2013 and March 2015, its share of the Mexican satellite TV market fell from 73% to 71%. During that same period, its share of the cable TV market fell from 54% to 52%.
But this is actually a very good thing. You see, earlier this year, the Federal Telecommunications Institute (IFT), Mexico's communications regulator, announced Grupo Televisa had "substantial market power," amounting to market control. This meant it could be faced with harsh regulations such as having to allow pay TV competitors to show its content for free.
This month, the IFT reversed its finding based on the company's declining market share.
As an investor, I'm not overly worried about a drop of 2 percentage points in a year and a half in a company that still dominates more than half of its core markets. And it frees the company from what could have been costly regulation. The lifting of this cloud should bolster investor sentiment going forward.
Univision's IPO Should Give Shares a Big Boost
For the final bullish catalyst, Grupo Televisa owns a major stake in Univision -- the largest U.S. Spanish broadcaster and the fifth-largest TV network in the States -- which is about to go public.
In 2012, Grupo Televisa made a $1.2 billion investment in Univision for a 5% equity stake, a 15-year bond that can be converted into another 30% stake and the option to acquire another 5% in the company. So its potential ownership stands at 40%.
Last year, Grupo Televisa received $313 million in royalties from Univision. And Univision filed a prospectus for a U.S. IPO later this year with an offering price of $100 million. But industry experts say the IPO could exceed $1 billion, making it one of the biggest offerings of the year, and Grupo Televisa stands to benefit handsomely from this.
How to Amplify an 8% Move Into a 58% Return
I'm setting my price target for TV at $29, which is 8% above the market price. But using a call option strategy, we can leverage that upside into 58% profits.
With shares of TV trading at $26.94 at the time of this writing, we can buy a TV Jan 26 Call for $1.90 a share ($190 per contract). The breakeven price is $27.90 ($26 strike price plus $1.90 option premium), which is 3.6% above the market price, but the upfront investment is a fraction of what it would cost to buy the shares directly.
If shares hit my $29 target before the option expires on Jan. 15, the call will be worth at least $3 ($29 stock price minus $26 strike price) for a 58% return in three months. Set a good 'til cancelled (GTC) sell order at $3 for the option after opening the position.
I want to purchase the calls today to get ahead of Thursday's earning announcement so we can benefit from the potential earnings upside. But even if shares don't rally as expected on the report, the January expiration means we can still benefit from the Univision IPO, which could send shares soaring into year end.
Note: Buying options on stocks is an amazing way to leverage a small amount of capital into big profits. Options expert Jared Levy specializes in earnings trades with a unique strategy that's delivered average annualized gains of 123%. To learn more about it or get his latest recommendation sent directly to you, follow this link.
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