I've lost track over the years how many investors have said that Seven West Media looks incredibly cheap. Even the legendary Kerry Stokes underwrote the company's last equity issue at double the current share price, now an all-time low 65c.
The first place to start, as always is with the company's financials. In Seven West Media's case they are not pretty.
The reasons for the decline are easy enough to understand. The company has been battered on all sides by the rapidly changing media landscape – whether it be the decline in free-to-air advertising for its flagship Channel 7, or the migration from print to online advertising for the West Australian newspaper.
| Financials | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 |
| Earnings (cents) | 41.7 | 24.2 | 23 | 19.4 | 20.1 | 13.7 | 11.1 |
| Dividends (cents) | 40.8 | 22.6 | 11.6 | 11.6 | 10 | 8 | 4 |
What can investors learn from this, to stop them being stuck in similar value traps?
Firstly, the market simply won't put a rating on profits that are steadily declining. If all a company is doing is managing the decline as best it can, it's rating is unlikely to be better than bargain basement, say 7x earnings.
Anyway, as Seven West Media shows, today's 7x can turn out to be tomorrow's 14x, so the investor ends up with an expensive stock, not a cheap one.
Secondly, it's one thing buying for dividend if your company is dull but stable, but not if earnings are under continual pressure. The investors who bought Seven West for its yield three years ago have already seen dividends shrink from 11.6c to 4c.
Thirdly, look out for companies that are taking decisive action to halt the decline. Seven West Media was slow to react to the digital threat. In hindsight, it should have bitten the bullet on the dividend years ago, and used the money to make a substantial investment in a growth asset.
Finally, ask yourself where your stocks fit into a changing landscape. For example, is Telstra Corporation Ltd (ASX: TLS) facing permanent change too? Is it a monolith there to be shot at by more nimble competition, has its dividend cut been too little too late?
Are retailers like Woolworths Limited (ASX: WOW) in the same position, or will there always be a profitable niche for them to exploit?
Foolish takeaway
There's a difference between a dull and boring stock, where what you see is what you get, and a stock which is in secular decline. The latter is a value trap. Your ideal stock to buy has to be one which can grow its profits, in a market that is itself growing.
