Should You Buy Fairfax Media Limited at this Price?

What happened to the FXJ share price?

Fairfax Media Limited [ASX:FXJ] shares picked up another 2.4% today after gaining over the last two days. The stock has now recovered its lost ground over the last five days. In comparison, the ASX lost 2% over the same period. The market has largely celebrated a dovish Fed, however, commodity prices weighed on sentiments with high stocks in energies, reminding again that fundamentals are not all that much better yet.

Why did FXJ shares do this?

Market analysts have a consensus ‘Outperform’ rating on FXJ. However, the market is predicting lower revenue in 2017. On the other hand, the market is seeing better earnings in 2017 than 2016 for Fairfax.

The long term growth outlook is negative for the company.

FXJ is not terribly cheap on a P/E basis, especially when it compares to sector peers. The company pays a good dividend, which no doubt sweetens the deal for equity investors. But the company has booked negative growths over the last five years. Net profit margin is mediocre, return on assets, return on investment and return on equity have all been negative over a five year period.

The company is liquid with plenty interest coverage and Fairfax also has low debt relative to equity. These are desirable financial qualities for any company. But do long term investors want to hold a company with a negative outlook?

What now for FXJ?

The positive outlook on earnings is what is making the market interested in Fairfax again. The medium target price on the stock is currently a 17% gain. This means analysts largely see the stock as undervalued against a backdrop of growing earnings in 2016.

Is the stock undervalued? FXJ’s current share price is much lower than its 2015 peak. From a purely technical point of view, there is no evidence for the stock having been oversold. However, if we are buying the fundamental forecast of the company, it could very well give some positive returns in 2016.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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