As an ilam resolution for 2013, I decided to learn more about the finances of some of the largest Korean entertainment agencies, (listed in order of size) S.M., YG, and JYP, which are all publicly listed on the KOSDAQ. For this post, let us look at the P/E ratios of these companies.
Just a bit of terminology before we delve into the fun stuff:
- a dividend is money paid out to stockholders from a company’s earnings. From what I know, none of the three Korean companies pay dividends.
- earnings per share (EPS) is a measure of a firm’s profitability, calculated by first subtracting dividends paid from net income, and dividing by the number of company stocks total.
- price-earnings ratio (P/E) is calculated by taking the current price of the stock and dividing it by EPS. Essentially, P/E is a measure of how much investors are willing to pay per unit of earnings. For example, Amazon’s P/E ratio is 3,085.12, meaning that investors are willing to fork over $3,805.12 for $1 in earnings from Amazon. The higher the P/E ratio, generally, the higher expectations for the company in the future. New companies which are volatile and have suspicious-looking revenue but have good promise will also sport high P/E, like Facebook, with 267.34. Companies with high growth rates will also have high P/E. However, remember that P/E should only be compared within similar industries in the same countries. Different accounting styles in different countries can result in different P/E; American P/E are traditionally higher than European P/E.
- trailing twelve months (TTM) is an abbreviation which indicates the timeframe of measurements like EPS and P/E.
With all that good terminology under our belts, we can start looking at the respective P/E.
Wait, why is there no P/E for JYP? For the past twelve months, JYP has been posting -156.00KRW EPS (TTM); essentially, people who have bought JYP stocks have been losing money for the past year; for every share, they have lost around 156KRW, where KRW is South Korea’s currency. What this means for JYP is that it is in very big doo-doo, and has probably been losing money in 2012; we can investigate this hunch when we look at JYP’s income and cash flow statements. When the EPS (the denominator) is negative, it is convention to not report the P/E.
Ignoring JYP, let us examine S.M. and YG. S.M. and YG are clearly above the industry average of 28.40, YG alone is above by a staggering 50%. This signals that the market clearly expects S.M. and YG to have huge headliners in the years to come. Moreover, the world economy is slowly growing, and so consumers– especially those in North America and Europe– who have made cutbacks to their spending in entertainment will increase their spending in 2013. This raises the entire entertainment industry’s P/E.
However, S.M.’s P/E is much higher than YG, suggesting that analysts feel that S.M. has more future growth potential than YG. Also, looking at market capitalization, S.M. is worth only $200 million more than YG. Therefore, the size of these companies are actually quite similar, but even then, S.M.’s P/E is still disportionately high. From the beginning, I have wholeheartedly agreed with the outlook that S.M. has the stronger growth potential. For one, S.M. has successfully tapped the Japan and Taiwan markets so far, using TVXQ, BoA, Super Junior M, and most recently, SHINee, SNSD, EXO-M. S.M. also is the most aggressive in recruiting Chinese and English-speaking trainees, and has the largest pool of applicants to choose from. Moreover, S.M. has a huge roster of big-name acts which have legitimately toured the world for several years, compared to YG, which currently only has Psy, BIGBANG and 2NE1, the latter two which focus mostly on Korea, and only recently stepped up overseas concert touring. Psy has signed with Schoolboy Records to promote in the US, and I doubt much of that revenue stream will reach YG– that is, if Psy manages to keep himself from being a one-hit wonder. This is a tall order because I am not entirely convinced Psy can continue to sing in Korean when releasing in the United States.
However, the excessively high P/E ratio may indicate S.M. is actually overvalued, which means that holders of S.M. stock should sell. I highly doubt this, because even though the P/E is really astronomical compared to YG, it is clear that S.M. has strong sources of revenue for the future and definitely stands to increase their net profit; perhaps not as much as expected, but well enough to make a healthy return on investment.
In sum, while it is interesting to compare to P/E ratios of similar companies, one must be reminded that a P/E ratio is not the most accurate measurement of projected future earnings and is only one of the things an investor should look at to determine the health of a company. Of course, from the standpoint of a pretentious know-it-all, while arguing the respective futures of S.M. and YG, I imagine lashing out their P/E ratios as evidence of S.M.’s crushing dominance would be quite fun.