The CTS Eventim stock has long been one of the top outperformers. Investors, who bought shares of the ticketing and event specialist with a value of 1,000 EUR in January 2003, have been pleased about price gains and dividends totaling 95,715 EUR at the beginning of 2020, which corresponded to a performance of over 9,600 percent! Then there was Corona and brought the success story to an (provisional?) end with all the security requirements, including lockdown. The cancellation of almost all live events forced the company to cancel the dividend. At times, the stock price slumped by over 50 percent. Currently, CTS Eventim is still trading more than 30 percent below its old high.
In this fundamental CTS Eventim stock analysis, I check whether CTS Eventim is worth buying at the current price level. In doing so, I not only look at the current situation but also examine the chances for the time after Corona. Will the stock see its old highs again?
The business model: How CTC Eventim generates mone
CTS Eventim divides its business into the two segments “Ticketing” and “Live Entertainment”:
Ticketing
CTS Eventim has become the world’s second-largest ticket seller after Live Nation Entertainment with its ticketing segment. In addition to ticket sales for its own events, the company also handles ticket sales for other event organizers and their events (e.g., the World Handball Championship). They also license their ticketing software to other ticket vendors. CTS Eventim sells around 250 million tickets per year via its systems. With this volume, the company distributes 60-70 percent of all tickets in Germany, making it the clear market leader. Since ticket sales are increasingly digital, CTS Eventim achieves a high gross margin in this segment, which in 2019 was 60.5 percent.
Live Entertainment
The Live Entertainment segment accounts for two-thirds of revenues. CTS Eventim bundles its major live events in this segment and has become the third-largest operator of such events worldwide and the largest in Europe. The company organizes and operates the festivals “Rock am Ring”, “Rock im Park”, “Hurricane”, “Southside” and “Lucca Summer”. It also operates several of Europe’s best-known venues, such as the LANXESS Arena in Cologne, the Waldbühne in Berlin, and the EVENTIM Apollo in London.
Besides, CTS Eventim organizes individual concerts or entire tours for artists such as The Rolling Stones, Ed Sheeran, or Phil Collins. Even though these events generate a high turnover, they are not very profitable, which is why the gross margin here is in the low double-digit range and was only 11.1 percent in 2019.
The Failed Toll Experiment
CTS Eventim almost added a lucrative business segment to its existing business segments. In 2018 CTS Eventim and the Austrian toll system provider Kapsch Traffic Com were awarded the contract for the implementation of a car toll system in Germany.
With a term of 12 years and an order volume of EUR 2 billion, the contract would have brought the company a good deal more money every year and put the business on an even broader footing. However, in June 2019, the European Court of Justice declared the toll to be illegal, after which the German Ministry of Transport terminated the contracts with CTS Eventim and Kapsch.
For CTS Eventim and its shareholders, the excursion into new territory may nevertheless have been worthwhile. Both companies’ joint venture is claiming payment of approximately EUR 560 million against the Federal Republic of Germany. This sum is said to have been contractually agreed in the event that the toll fails.
CTS Eventim’s secret of success
The success of CTS Eventim consists of more than selling many tickets and hosting live events. Because by the close interlocking of both business segments and the acquisition of competing ticket sellers and concert promoters, the company has created a quasi-monopoly in Europe, including high market entry barriers.
Thus, until the Federal Cartel Office intervened (see below on risks), CTS Eventim enforced against other promoters who wanted to use the CTS Eventim ticket system that they had to sell all tickets exclusively via the CTS Eventim ticketing system. This ensured that other ticket sellers either bled out financially or were unable to gain a foothold in the market in the first place. Besides, close partnerships exist between event organizers and ticket vendors in the ticket business.
Therefore, a new competitor in the ticket market would have difficulty obtaining ticket contingents for popular events. Today many organizers either own CTS Eventim or are tied to the company with exclusive connections. CTS Eventim has thus become a platform that benefits from the same network effects as Facebook.
Business risks
Despite its dominant market position, the business model of CTS Eventim is exposed to several risks.
Competition
In addition to intense competition from the US competitor Live Nation Entertainment, which operates the platform ticketmaster.de, it is above all Amazon, whose market entry hovered over CTS Eventim like a sword of Damocles for a long time. When Amazon chose Great Britain as a test market for its entry into online ticketing in 2016, it considerably shook up the market. After two unsuccessful years, however, the online giant decided to end the experiment. In 2018, Amazon postponed its planned market entry in the USA.
Amazon’s failure is a clear indication of the high barriers to market entry and the moat that the company has built up with its ticket sales organization. Even Amazon, the nightmare of entire economic sectors, was not able to gain significant market share. Furthermore, it is remarkable that the operating margins of the big competitor Live Nation Entertainment are significantly lower compared to CTS Eventim.
Regulation
Also, CTS Eventim leads several feuds with the Federal Cartel Office. For example, Germany’s highest competition authority prohibited the now insolvent competitor Four Artists’ acquisition. Furthermore, the Federal Cartel Office also prohibited the management of CTS Eventim from requiring other promoters to use the CTS Eventim ticketing software exclusively for all tickets.
Although the adverse effects of the outstanding market position is shown here, the Federal Cartel Office’s intervention confirms the deep moat that CTS Eventim has dug. Positive for CTS Eventim is the Federal Cartel Office’s explicit permission regarding exclusive use of the ticketing system by other operators if this does not exceed 80 percent of the total ticket quota. The business model in the ticketing segment is, therefore, not threatened.
Special outstanding events
Special events such as the Corona pandemic or terrorist attacks pose a threat to the entire industry. In such cases, necessary security measures, such as limiting the number of spectators or even the complete cancellation of events, adversely impact sales and profits.
Revenue development of CTS Eventim
In the past, CTS Eventim impressed with its steady revenue growth. The company increased its revenue from EUR 224.38 million in 2003 to more than EUR 1.4 billion in 2019, but the consequences of the Corona Pandemic will set revenue back by almost ten years in 2020, shrinking to EUR 403 million.
As soon as the pandemic is over, however, revenue should pick up again. However, reaching pre-crisis levels could take until 2023 or even 2024. I doubt, though, that the pandemic will fundamentally change the public’s attitude to events. After all, the need for collective experience is as old as humankind itself, which is why events such as concerts, sporting events, and plays are likely to continue to take place. In a survey conducted by CTS Eventim, 75 percent of those surveyed said they would return to live events within four months of removing corona restrictions. 90 percent said they missed live entertainment. From this point of view, rising sales seem only a matter of time – assuming the appropriate staying power.
Is CTS Eventim profitable?
In addition to revenue growth, rising profits have been constant in recent years. Starting from 0.05 EUR earnings per share in 2003, CTS Eventim increased the profit to 1.38 EUR in 2019. 2020 will be the first loss-making year since the IPO with -0.56 EUR. With profit too, it will probably take several years until CTS Eventim will build on old record profits.
The increased profits in recent years should not hide the fact that the company has struggled with a shrinking margin from time to time. Recently, margins have been falling, mainly due to higher personnel costs and investments in the ticketing segment’s further digitalization. Furthermore, the margin in the Live Entertainment segment is dependent on high-margin events. While the fluctuating margins were never dramatic at any time, long-term investors should always keep an eye on them regardless of the pandemic.
Does CTS Eventim pay a dividend?
Usually, CTS Eventim distributes 50 percent of its profits to shareholders. Since 2006, the company has paid a dividend and increased it from EUR 0.09 to EUR 0.62 in 2019, but the collapse in profits in the wake of the Corona Pandemic that year forced the company to suspend the dividend. The company thus distributed none of the profit already generated in 2019 to its shareholders, which increases the probability that a dividend will be paid again soon in the event of a recovery.
However, I consider a quick increase of the dividend to pre-crisis levels to be unlikely because the security measures and restrictions required for live events will probably extend well into 2021. Furthermore, I suspect that the founder and CEO, Klaus-Peter Schulenberg, would rather keep the money together in case of doubt than pay a dividend in uncertain times. Such responsible management would, in any case, be typical for owner-managed companies.
The fair value of CTS Eventim
As you can see, the CTS Eventim stock appears overvalued despite its discount, mainly since profits and cash flows are down as a result of the pandemic and are expected to recover somewhat hesitantly in the coming years. The fair value of EUR 25 per share, calculated for the end of 2022 based on adjusted earnings, shows that it may take several years before the increased profits again justify the current share price. However, I interpret the share price to mean that the market and the analysts expect a complete recovery from 2023 onwards and are already pricing in this fact.
Nevertheless, the question is whether CTS Eventim will survive a second corona season like the first one financially. Fortunately, the company has over 800 million EUR in cash. Besides, expenses are reduced if no or fewer events need to be planned and prepared. Therefore I do not see an existential danger even in the case of a second corona year.
Conclusion: CTS Eventim stock – corona victim with charms
It will probably take several years until CTS Eventim recovers from the corona shock. Nevertheless, the market has already partially priced in the recovery in the stock price. The yield potential is thus limited. On the other hand, the CTS Eventim stock is still trading well below the old highs, and the described moat against the competition is also intact, maybe even more robust than ever. Because of the risks pointed out by Corona, potential competitors will think twice about competing with CTS Eventim. Whoever is resistant to the pressure of short- and medium-term uncertainty as an investor could consider CTS Eventim as a buy. By diversifying through different stocks, you can also spread the risk of an investment in CTS Eventim with a stock savings plan. With this method, you build up your position successively and profit from falling prices.
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