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Shares of leading children’s media company Genius Brands International (GNUS) plummeted more than 19% in price after the company last week announced its recent deal to acquire WOW! Unlimited Media. In addition, the company has weak financials and poor profitability. So, is the stock worth betting on now? Let’s find out.

Genius Brands International, Inc. (GNUS) in Beverly Hill, Calif., is a prominent worldwide children’s media company that creates, produces, markets, and licenses branded children’s entertainment properties and consumer products for distribution in media and retail. In addition, it acts as a licensing agent for Llama Llama.

The stock has declined 25.3% in price over the past nine months and 11.5% over the past three months to close yesterday’s trading session at $1.39.

Though GNUS is working on various collaborative projects and major product launches to accelerate its growth, the company’s poor profitability and financial fragility could make investors anxious.

Here’s what could shape GNUS’ performance in the near term:

Acquisition can Drain Cash Reserves

This month, GNUS agreed to acquire WOW! Unlimited Media for approximately CAD66 million ($53 million) through a cash and stock deal. With the acquisition, GNUS intends to accelerate its company’s financial growth in a drive to become the world’s foremost producer, broadcaster, and consumer product licensor of high-quality children’s entertainment.

However, the deal includes a significant cash component that is expected to require a substantial cash outlay in the near term, impacting GNUS’ already weak balance sheet.

Lackluster Financials

For the second quarter, ended June 30, 2021, GNUS’ operating expenses increased 237.6% year-over-year to $9.92 billion. The company’s operating loss grew 218.7% from the year-ago value to $7.57 billion, while its net loss came in at $7.38 billion. The company’s loss per share amounted to $0.02 over this period. Its net cash used in operating activities surged 284.9% from the prior-year quarter to $8.97 billion. In addition, its cash and cash equivalents declined 41.9% to $58.37 billion for the six months ended June 30, 2021.

Poor Profitability

Its trailing-12-month ROC, ROA, and levered FCF margin are negative 14.3%, 47.8%, and 78.6%, respectively. Its 0.04% asset turnover ratio is 96.7% lower than the 1.1% industry average. Furthermore, GNUS’ trailing-12-month cash from operations stood at negative $14.49 million compared to the $208.96 million industry average.

Unfavorable POWR Ratings

GNUS has an overall F rating, which equates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. GNUS has an F grade for Stability and a D for Quality. The stock’s 1.84 beta is in sync with the Stability grade. In addition, the company’s poor profitability justifies the Quality grade.

Of the 17 stocks in the D-rated Entertainment – Media Producers industry, GNUS is ranked #16.

Beyond what I’ve stated above, we have rated GNUS for Sentiment, Growth, Momentum, and Value. Get all GNUS ratings here.

Bottom Line

While GNUS has been striving to expand its business through various collaborative projects and acquisitions, the company’s unstable financials and poor profitability have caused its shares to retreat in price significantly over the past months. In addition, the stock is currently trading below its 50-day and 200-day moving averages, indicating a downtrend. So, we believe the stock is best avoided now.

How Does Genius Brands International Inc. (GNUS) Stack Up Against its Peers?

While GNUS has an overall POWR Rating of F, one  might want to consider looking at its industry peers, News Corporation (NWSA), AMC Networks Inc. (AMCX), and MSG Networks Inc. (MSGN), having an overall B (Buy) rating.

GNUS shares fell $0.01 (-0.72%) in premarket trading Tuesday. Year-to-date, GNUS has declined 0.00%, versus a 24.34% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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