A reader wants to know: Is this music provider a good buy?

Q – I would like to know more about Stingray Digital (TSX: RAY.A ).
This company claims to be the world leader as a streaming music provider, and a multitude of music services. More than 80 per cent of revenue is recurrent. Last year La Caisse de Depot increased its ownership and recently the CEO/founder increased his ownership substantially. The stock pays a dividend and is increasing it. The shares keep moving up. I would certainly appreciate an opinion from IWB on this highly performing company. 
Thank you. – Pierre D.

A – There seems to be a fair amount of interest in this Montreal based company judging by the number of questions we have received. You may not know it, but you probably have its service on your TV set – Stingray provides the content for a large number of music channels in the upper ranges of your band.

As our reader points out, the stock has been a strong performer recently. After falling as low as $7.19 in June, the shares have moved steadily higher and closed on Nov. 24 at $9.30.

The stock looks expensive at that level. The trailing p/e ratio is 51.7, which is pricy by any standard. The company is growing, but not by enough to justify that level of p/e. First-quarter 2018 revenue (to June 30) was up by 18.9 per cent, which is a nice bump although not enough to support that level of investor enthusiasm. Recurring revenue (the best kind for any business) was 87 per cent of total revenue and that, of course, is a real plus.

Adjusted net income for the quarter was $5.7 million ($0.11 per share) compared to $5.2 million ($0.10 per share) the year before. Free cash flow was $7.2 million, up from $5.9 million last year. The company recently increased the quarterly dividend to $0.05 per share ($0.20 per year). The stock yields 2.1 per cent.

The company appears to be solid and its revenue looks secure. However, as mentioned, it looks very pricy at this level. As a result, I would not recommend buying at this time but it's worth keeping an eye on the shares and taking advantage of any significant retreat in the price. – G.P.

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