IT’S not hard to see why shareholders are so down on HMV. Its traditional source of revenue – CDs, DVDs and video games – is being quickly eroded by digital replacements. And its foray into ticketing, live music and music-themed memorabilia and clothing isn’t convincing the market. That said, HMV is massively oversold: it has lost 35 per cent of its value since the start of they year, earning it a demotion to the FTSE 250.
Fears over HMV’s long-term future have been priced in, but they fail to recognise the upsides: management, led by the able Simon Fox, has a good track-record of growing profits against a tough backdrop; and if forecasts are met when HMV reports this week, the shares will be trading on just 4.3 times earnings – a massive discount to the rest of the retailers.
Still, with the shares trading on a dividend yield of around 14 per cent, the payout is looking increasingly at risk. Although the firm says it can make this year’s 7.4p payment thanks to underlying cashflow, it is unlikely to keep it up. It might not be fair, but this stock is priced to fail. Investors should sell on any short-term lift at the results this week.