🗞 Value Play or Value Trap? These 4 Stocks Look Deceptively Cheap

Happy Sunday! 👋 

This week we’re taking a look at 4 companies that look cheap at first glance, but might actually be value traps.

Let’s dive in!

Value Play or Value Trap?

There are many ways to define a “value trap”, but often it refers to a stock that appears cheap on the surface (P/E, Dividend Yield, etc.), but is actually experiencing a decline in its business performance when you look under the hood.

Value traps can regularly show up in situations where an industry is undergoing a major shift, and once-loved business models begin to get disrupted. For example:

• Newspapers before the internet

• Video rentals before streaming

• Taxis before ride sharing

Here are 4 companies that could fit that description:

1. SiriusXM

SiriusXM has been the premier player in the satellite radio industry since the 2008 merger between Sirius and XM. Thanks to developing strong ties with automotive manufacturers, most cars in the US now come pre-installed with SiriusXM as an option which has helped SiriusXM grow its revenue by 13% annually between 2008 and 2022.

However, as the world has shifted to more affordable and convenient audio streaming platforms like Spotify and Apple Music, consumers are opting out of satellite radio.

Despite trading at a seemingly attractive multiple (EV/FCF: 16.2x), the shift to audio streaming has put pressure on both SiriusXM’s subscriber numbers as well as their average revenue per subscriber.

2. Western Union

Western Union currently offers an 11.7% dividend yield. Sound enticing?

Well, despite being one of the global leaders in remittances for more than 100 years, Western Union is now facing a major headwind as the world shifts to digital remittances instead of physical cash transfers.

With digital first competitors competitors like Remitly, Wise, and Revolut offering a faster, lower cost, and more convenient solution, consumers are no longer choosing Western Union.

Despite the optically cheap valuation, this underlying shift in the industry should likely continue to hurt Western Union’s financials moving forward.

3. Altria

For more than a century, Altria (formerly Philip Morris) has been the leading manufacturer of tobacco products in the US, particularly cigarettes. While cigarette consumption has seen modest annual declines for the better part of 3 decades, Altria has consistently offset those declines with price increases.

Coupled with consistent dividends to shareholders, this has allowed Altria to become more than 100-bagger since 1990! 

However, with the rise of new age products such as vaping and nicotine pouches in the US, the rate of volume declines has accelerated to such a pace that Altria is no longer able to grow its revenue through price increases. With no leading new age products in its portfolio, this could be a major headwind for Altria moving forward.

4. Warner Bros Discovery

Warner Bros Discovery (WBD) was once a leader in the television industry. Home to TV networks such as the Discovery Channel, CNN, HBO, Food Network, and many others, WBD used to pull in tons of sticky cable subscription fees as well as traditional advertising revenue.

However, as consumers have been increasingly "cutting the cord" from their expensive cable bundles in favor of more affordable, flexible streaming options, WBD has lost much of its subscriber base and ad revenue from linear networks.

As WBD tries to shift its IP to streaming formats, the field has become far more competitive and cancelling has become much easier for subscribers.

Though shares are down 77% from highs and the company is currently valued at ~9x its estimated EBITDA for the next 12 months, this cord-cutting headwind will continue to put pressure on profits.