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Small-Cap Confidential
Undiscovered stocks that can make you rich

Cabot Small Cap Confidential 264

This month we are changing things up a little and featuring a small company I suspect you’ve never heard of. It’s an up-and-coming Canadian media production and distribution company.

The company’s content has increasingly shown up on Netflix, AppleTV+, HBO Max, Amazon and Peacock. Much of the programming is for kids and families, which is where the growth and more significant deal flow is. But the company has also had many years of success in reality TV.

It is a speculative investment and trading liquidity is thin, so treat it appropriately and space out share purchases. Part of the strategy here is that we’re following a micro-cap fund that I respect into this trade, and their successful track record, philosophy and long-term holding strategy lends credibility beyond the increasingly visible presence of the company’s programming.

Cabot Small Cap Confidential 264

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The Big Idea
It should come as no surprise that streaming is a huge trend.

Netflix, Amazon, Hulu and Disney+ have enjoyed massive success, so much so that everybody else has realized they need a streaming presence and are entering the market too. We see AppleTV+, Peacock, HBO Max, CuriosityStream, Discovery+ and so many other players ramping up their content and spending billions of dollars in the process.

THBRF Content Spending

The challenge is that there is just so much demand for content. Not only do all these platforms need to create original programming, but some of the content libraries they use to have access to are being pulled as the original creators build out their own services.

The best example is Disney, which doesn’t have a lot of incentive to provide content to Netflix now that Disney+ is up and running. This leaves Netflix looking for new programming.

While certain players, like AppleTV+, prefer to focus on original shows, many platforms source content from a variety of media and production companies. In particular, content aimed at kids and families is huge. Streaming services see it as a cornerstone of their strategies to grow subscriber viewing and reduce customer churn.

Another wave of demand may easily accompany widespread rollout of 5G, which will allow users to download content in mere seconds, regardless of where they are!

Today’s investment is a pure-play, micro-cap company that creates and owns global, award-winning scripted, factual and animated programming. Revenue growth was up 40% last year. And a fund I respect, Conestoga Capital Advisors Micro-Cap Fund, just began building a position in Q1 2021.

Let’s get into details.

The Company
Thunderbird Entertainment (THBRF, TBRD.V) is a Canada-based multi-platform, media production, distribution, and rights management company. The company’s programs span a variety of genres, but it is particularly focused on children’s productions, scripted comedy and drama, and non-scripted (factual) content. Thunderbird also has a global distribution and consumer products division. The company has a market cap of $180 million U.S ($221 million Canadian).

Thunderbird’s programs are currently available on broadcast and cable channels within the U.S., Canada and other countries, as well as on most of the major digital platforms, including Apple TV+, Disney+, Netflix, HBO Max, Hulu, Netflix, Peacock and PBS Kids. Additional well-known networks with Thunderbird’s content include Nickelodeon, Discovery Channel, NBCUniversal, CBC, National Geographic and The History Channel.

THBRF Customers

Altogether, Thunderbird’s content airs daily in 40 different languages and reaches over 200 territories around the world.

The Covid-19 pandemic has changed how Thunderbird does some things. The workforce of more 1,000 employees and crew members are now able to work from home, which has opened up staffing opportunities unburdened by geographic and/or studio space constraints. There has also been a material increase in demand for content.

Big picture, Thunderbird’s growth strategy revolves around growing its various brands by expanding programming libraries and leveraging owned and/or controlled intellectual property (IP). This drives fee income during production and distribution windows for programs.

As you’d expect, the company is very focused on growing with over-the-top (OTT) platforms (Netflix, Amazon, AppleTV+, etc.) as there is very high demand for content in this market, especially for kids and family programming.

However, successful content leads to other opportunities. Thunderbird is intent on building brands that are well-recognized in the marketplace and which can create additional revenue streams from licensing merchandise, music and video games.

The company has also been an acquirer of brands, and this will continue to be part of the growth strategy.

Products & Platform
Thunderbird has three main brands. The first, Atomic Cartoons, is aimed at kids and families. The second is Great Pacific Media (GPM), which focuses on non-scripted, factual programming (reality, documentary, etc.). Lastly, Thunderbird Productions focuses on scripted content.

Atomic Brands
Thunderbird acquired Atomic Brands in 2015 to accelerate the buildout of its animated kids and family programming. Atomic’s content spans pre-school, comedy, action adventure, adult and everything in between. It has been a huge success, leading to an extensive list of clients and partners that include Netflix, Nickelodeon, PBS, Sony AppleTV+, Teletoon, Treehouse, Cartoon Network, Peacock, Disney, Mattel, Warner Bros., Marvel, Microsoft, Lego, Spinmaster and NBCUniversal.

Notable Atomic productions Atomic has/is working on include The Last Kids on Earth, Trolls: Trollstopia, Molly of Denali, Curious George, The Lego Star Wars Holiday Special, Hello Ninja, and Beat Bugs.

THBRF Atomic Cartoons

The Last Kids on Earth is particularly notable as the company owns the IP behind the series and will launch a video game inspired by it this spring. A toy line is also on the way.

Some of Atomic’s success can be traced to the opening of an L.A. office in 2017, which gave Atomic more access to showrunners, directors, writers, designers, storyboard artists and editorial teams. Examples of talent that have worked with Atomic include Drew Barrymore, Savannah Guthrie and writers from The Simpsons.

To build on this, Atomic expanded into Vancouver in 2018. Most recently, in January 21, it launched its global distribution and consumer products division out of L.A.

Great Pacific Media (GPM)
Great Pacific Media (GPM) has grown into a significant player in the non-scripted marketplace with multiple series that have run for years. It develops, produces, co-produces and finances factual, documentary, competition, and reality-TV shows.

Some of GPM’s productions include High Arctic Haulers, Queen of the Oil Patch, $ave My Reno, Worst to First and Highway Thru Hell.

THBRF Great Pacific Media

The best known, Highway Thru Hell (HTH), is a reality-TV show that chronicles the adventures of truckers and heavy rescue towing operations that navigate steep mountain passes and winding roads on some of the most treacherous highways out there. Much of the show takes place along a 201-mile stretch of the Coquihalla Highway, which connects Vancouver to the Canadian Rockies. HTH aired its 100th episode in 2019 and is currently in its ninth season. It runs on Discovery Canada and is distributed in over 190 territories worldwide, including The Weather Channel.

THBRF HTH

GPM owns the majority of its IP, has a vertically integrated studio (i.e. it owns facilities and production equipment) and is generating revenue/cash flow from almost all projects. It has also spun two shows out of Highway Thru Hell, including Heavy Rescue: 401 and Mud Mountain Haulers (premiered January 2021), making it one of the more successful unscripted brands out there.

Thunderbird Productions
Thunderbird Productions is a smaller division, focused on scripted series. The best known is the comedy series Kim’s Convenience, which airs on CBC in Canada and is available on Netflix. It is also available through various streaming, cable and on-demand partnerships throughout the world, including Asia. Season 5 premiered in January 2021 and Kim’s Convenience has been renewed for Season 6.

Global Distribution And Consumer Products
After Q2 2021 closed (on December 31, 2020) Thunderbird launched a Global Distribution and Consumer Products Division. Given how new this division is there’s not a ton in the pipeline just yet, but it’s building.

In 2019 the company reached a Master Toy deal with JAKKS Pacific to develop and market action figures, activity toys, vehicles, plush items, games and electronics. The line launched in 2020 at the retailer Hot Topic.

Thunderbird is now planning a June 2021 release for The Last Kids on Earth and the Staff of Doom video game, which will be available on Nintendo Switch, PlayStation 4 and other consoles.

THBRF Last Kids

This game launch builds on The Last Kids on Earth franchise, which began as an illustrated novel in 2015 and became a book series. The premise features a young boy (Jack) who is one of the few survivors in a dystopian, post-apocalyptic world. Together with his former classmates, he fights for survival against zombies and other comical monsters in a cartoon-y take on horror.

Growth Initiatives
Focus On Higher Budget, Higher Quality Programs: Thunderbird continues to upgrade both its content quality and budgets as it builds out its programming library, as well as rights to IP. This should drive longer running programs and increase the value of the content library.

Kids and Family Programming: This is where the growth and viewer retention is, so expect Thunderbird to continue focusing on this important segment of the market.

Focus on OTT Platforms: The global trend toward streaming is undeniable, and Thunderbird is leaning into it, working with partners such as Netflix, Amazon, Peacock, AppleTV+ and more to build brands through both acquisitions and proprietary programming.

International Growth: Thunderbird seems to have a more significant presence in Canada then elsewhere, but its presence in the U.S. and abroad is also rising. Continued focus on content aimed at international markets represents a growth opportunity, both for content as well as consumer products.

Global Distribution And Consumer Products Division Launch: The aforementioned launch of this division could be a major growth driver in the years ahead.

The Business Model
Thunderbird generates revenue for production services, which is work performed on projects where it does not own the IP. Beyond providing recurring revenue, these services help raise Thunderbird’s profile with key broadcasters and clients and can be leveraged for future proprietary productions. The company also works on partner-managed deals whereby productions are fully funded, and rights are controlled by the partner, but Thunderbird manages things and generates a percentage of merchandise and consumer product sales.

The company also generates revenue from licensing and distribution, whereby Thunderbird retains ownership of the IP and enters into broadcast and/or distribution contracts to transfer licensed programs. In recent quarters the company has placed a greater focus on licensing and distribution.

The Bottom Line
The following numbers are reported in Canadian dollars. Thunderbird grew revenue by 41% to $81.3 million in fiscal 2020 (ended June 2020).

Through the first half of fiscal 2021 (Q2 ended December 31) revenue grew 56% to $47.7 million. Production Services (mostly from animation services) revenue was $33.8 million (71% of total revenue) and grew by 53%. Licensing and Distribution revenue was $13.8 million (29% of total revenue) and grew by 63%, mostly due to the delivery of 10 episodes of the animated series The Last Kids on Earth and six episodes of Highway Thru Hell (season 9). Diluted EPS in the first half of fiscal 2021 was $0.06, up from $0.02 in the first half of fiscal 2020.

In Q2 2021 revenue was up 98% to $28 million. The company was in various stages of production on 13 animated TV programs and two feature-length films, including a Curious George movie for Peacock. Diluted EPS in Q3 was $0.03, up from a loss of a penny in the year-ago quarter. There are no consensus estimates for Thunderbird, but as you can see the revenue growth trend is quite attractive. There is also a growing backlog of upcoming content.

Thunderbird had cash inflows of $5.2 million in the first half of the fiscal year and ended Q2 with $18 million in cash.

Risk
Seasonality: Revenues are largely dependent on the number and size of programs delivered during a given period, therefore there is variability in both revenue and cash flow throughout the year.

Reliance on Broadcaster Budgets: Thunderbird is somewhat reliant on broadcaster budget and financing cycles, which may be largely out of its control.

Microcap Stock: Thunderbird is a micro-cap stock and trading liquidity can be very light. This can lead to significant share price movement, both to the upside and the downside, depending on buyer/seller interest on a given day.

Canadian Listed Stock: Thunderbird’s primary listing is on the Canadian stock exchange in Vancouver. While shares can be bought through a U.S. market maker, it’s still a Canadian listed company and therefore it’s generally seen as a more speculative investment (which it is).

Reliance on Consumer Viewing Trends: As with all content producers, Thunderbird’s success will ultimately depend on its ability to create compelling content. Whether that be for wholly owned productions, or productions created by partners, content is key.

Competition
There are a ton of media production companies around the world – too many to list. A short list of major players in the U.S. includes WarnerMedia, Walt Disney, Fox, NBCUniversal, ViacomCBS and Sony, but there are hundreds more that aren’t household names.

The Stock
Trading Volume: In the U.S., THBRF trades an average of 21,000 shares a day. This is the less liquid stock issue. In Canada, the stock trades as TBRD.V (or TBRD.CA, depending on your broker), and nearly 91,000 shares trade daily. In either case, with a share price below 5 in both markets total trading value is typically below $500,000 daily. This is clearly a speculative stock that’s somewhat illiquid, so it’s best to use limit orders and average in. If you see the stock up materially today (and tomorrow) it could easily be because of our subscriber group, so be patient and spread out your purchases.

Historical Price: TBRD.V went public on the TSX Venture Exchange on November 2, 2018. On November 10, 2020 Thunderbird began trading in the U.S. with the ticker symbol THBRF. While I expect most subscribers will buy the THBRF issue, my data source (PANARAY) uses the TBRD.CA symbol and Canadian pricing. This is the ticker in the stock chart below, so I’ll use the Canadian share price for this discussion. The TBRD.V price will be the same, while the TBHRF price will be a little lower, owing to the conversion from Canadian to U.S. dollars.

Last November TBRD.CA was at around 2.4. The increased visibility of the U.S. listing, combined with solid financial performance, helped the stock walk higher. It hit 3.4 on January 12, 2021, pulled back a little over the next two weeks, then ran up to 4.9 by March 8. After another pause, shares rallied to an intra-day high of 5.4 on April 12. The stock has since pulled back by around 15% and now trades right on the 50-day line, near 4.6. Since last July buying at the 50-day line has been a splendid strategy for this stock. Hopefully, that pattern will hold.

Valuation & Projected Price Target: Valuation isn’t all that relevant with a speculative micro-cap stock like this that’s growing at over 40%. It’s really about the growth. In terms of benchmarking, the EV/Trailing Revenue ratio currently sits at about 2.4. It has been trending up, roughly in line with the share price.

Buy Range: In the near-term, provided the 50-day line acts as support again, expect to buy the Canadian listed shares in the 4.25 to 5 range (roughly 3.5 to 4 if you’re looking at THBRF). As always, guidance will be updated via our Weekly Updates.

The Next Event: Management is expected to present Q3 2021 results around May 27.

THBRF General Info

THBRF Financials

THBRF-050621

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Thunderbird Entertainment
(THBRF, TBRD.V)
New4Buy

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary
Buy
means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.


The next Cabot Small-Cap Confidential issue is scheduled for June 3, 2021.

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