As we approach the New Year, we scanned for companies in France that have earnings as fine as their wine. We looked at companies that are performing well on our most comprehensive model, the Combined Alpha model, while weeding out those that may have poor credit or earnings quality. Five companies passed our screens including a couple of automakers that may be benefiting from Volkswagens woes. However, there’s one company that colors a lot of dreams.
Technicolor SA (TCH.PA), is involved in the development of technologies and supply of digital production, post production and distribution solutions and services for a range of content creators. One example is handling the video effects and sound in post-production for the James Bond film, “Spectre.”
Content is being created at a furious pace now and quality is the top priority, which is good news for Technicolor. The company scores highly on the Combined Alpha model with a score of 95 (out of a possible 100), backed up by strong Earnings Quality and Analyst Revisions model scores in the top decile. Let’s take a closer look at this picture.
Source: Thomson Reuters Eikon/ StarMine
Bright silver screen
Technicolor earnings seem to be of high quality as seen by the strong 95 score on the Earnings Quality model. The company has seen return on net operating assets improve over the past five years, reaching a five year high of 49% in the last reported semi-annual period. That is far above the industry median, and a sign that management has done a good job of using assets efficiently to generate returns.
It looks like the improving efficiency is being driven by better operating profit margins, which indicates that Technicolor is producing a superior product and is able to charge a premium that customers will accept. The last trailing one-year operating profit margin was reported at 11.7%, a five year high. The company continues to have a small but focused R&D team that continues to innovate, and will likely drive earnings and margins in the future.
Source: Thomson Reuters Eikon/ StarMine
Boffo results
Cash flows at Technicolor seem to be robust too. When earnings are backed by strong cash flows they tend to be more sustainable in the long run. Technicolor has reported positive earnings in each of the last three semiannual periods. Even more encouraging is that in each of those periods, free cash flow has exceeded net income. In the last reported period, net income came in strong at €50 million, but free cash flow far exceeded that at €140 million.
Source: Thomson Reuters Eikon/ StarMine
Spotlight on R&D
As content creation becomes more critical to the success of media companies, the R&D team of 250 will need to continue to innovate. They have patented important technologies like compressing high quality videos so streaming is easier. The company made some key acquisitions in the last year including FX expert TheMill. These should help earnings going forward, but in the meantime, Technicolor looks like a star on most of the StarMine models.
