Changing of the Guard at “Idol”

This is an article about Simon, just not the Simon most American Idol viewers immediately think of.  Of course, last night’s season finale of American Idol was a farewell to the likable curmudgeon judge Simon Cowell, who many would say has been the face of the extremely successful talent show franchise.  Instead, it is the show’s other Simon, creator Simon Fuller, who has our attention today, after it was confirmed by the Wall Street Journal that he is leading an investor group to purchase CKX, Inc (CKXE).

CKX is a media company which owns the rights to television properties “American Idol” and “So You Think You Can Dance” among others.  Additionally, CKX holds 85% ownership in Elvis Presley Enterprises and an 80% ownership of Muhammad Ali Enterprises; both of which control nearly every business aspect of these two idolized Americans.  The group lead by Fuller has offered $600 million for CKX, which is 54% lower than Fuller’s failed attempt to buy the firm for $1.3 billion in 2008.  The company has seen its stock steadily decline over the last few years and now stands at only 20% of its market value five years ago.

Obviously, CKX has some very valuable assets and this has the potentially to be a great buyout at a low price, but there are some headwinds to contend with.  For example, this week’s “Idol” finale fetched the worst ratings of any finale since the first season (there have now been nine seasons), even with the added attention for it being super-judge Cowell’s last show.  Ratings were down 18% from last year.  Not to confuse the issue, the ratings are still outstanding and grab the number one spot in weekly ratings often, but key demographics such as 18- to 49-year olds were down 10% over the course of the entire season.

The declining popularity of Idol and the aging target consumer for both Elvis and Ali memorabilia, etc may be an important reason for CKX’s price depreciation.  However, Fuller has proven his creative worth, and we believe could easily enhance profitability with this set of assets.  Coming into the day, we had the stock rated Undervalued because its fundamentals like cash earnings and sales have actually held up better than the stock price.  For example, over the last five years CKXE has traded for a price-to-cash earnings multiple of 20.0x to 51.1x, but currently it stands well below that range at 15.8x.  On a price-to-sales basis 2.3x to 6.5x has proven to be a normal market valuation historically, but it is currently only 1.2x.  These metrics are based on yesterday’s closing price, before the stock spiked more than 20% on this news.

At Ockham, we think the timing on this announcement is very interesting; coming the day after the close of American Idol’s ninth season.  According to our methodology this stock is cheap, and we do think there is as yet untapped value in all of the quality assets housed under the CKX umbrella.  What do you bet Fuller has something up his sleeve?

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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