Is The Heavy Selling Of Media Stocks Warranted?
The media and content business has long been one of our favorites, for several reasons:
- They have a nice dual revenue stream of carrier affiliate fees and advertising. The former gives these firms a reliable, predictable, and steadily rising stream of cash flows. The latter allows them to capitalize in strong economic climates (which are far more common than recessions where it hurts).
- Strong and reliable cash flows give media companies a variety of options to reward shareholders. Most pay a dividend and buy back copious amounts of shares. The predictability of cash flows also allow them to "lever up" with debt to pursue growth.
- Most own their programming. This allows them to benefit from monetizing it across various distribution sources (cable, over-the-air, streaming, Blu-ray, etc.).
These factors have helped media companies become great investment candidates, with low volatility and rising stock prices over the past decade.
That has come to a screeching halt this summer.
Cutting The Cord On Media Stocks
Take a look at the recent carnage across several current Magic Formula media stocks (plus Disney, the segment leader):
|Company||Last 30 Days||2015 To Date|
|Scripps Interactive (SNI)||-10.04%||-21.93%|
All of them have been pummeled after the June quarter, and all but Disney have been crushed for the year. What is going on?
Across the board, we hear the same story:
- Disney saw affiliate fee increases, but suffered a 15% revenue drop in their broadcasting business due to "lower advertising revenue" and "declines in subscribers".
- Viacom's affiliate revenues were up 2%. But domestic ad revenues fell 9% due to "weak domestic ratings".
- Scripps enjoyed 3.5% affiliate fee growth. But ad revenue was up just 1.4%, with the company citing "audience delivery issues", which translates to low ratings and reduced audiences.
- Same story for Discovery. 12% distribution (affiliate) growth with higher rates. But ad revenues were flat, with better pricing but lower audiences.
Lower audiences, reduced ratings. That's the story here.
As it usually does, the market has tried to make it simple and point to a single problem: the "cord cutting" phenomenon, where consumers (particularly younger ones) opt to forego a cable/satellite bundle to get their entertainment from cheaper sources, like Netflix (NFLX), Youtube, and internet streaming sources.
Does this explanation hold up?
Is Cord Cutting The Real Issue?
There are certainly some statistics that prop up the "cord cutting" excuse:
- Netflix has seen continuing strong subscriber growth. Subs grew 30% year-over-year in the most recent quarter, maintaining about the same growth rate it has seen for the past 5 years. The service will end the year with nearly 70 million subscribers.
- Comcast has experienced video customer net losses for over 5 consecutive years now.
- Both advertising dollar and upload growth at online video sites like Youtube and Vimeo have been staggering, increasing at about a 35% annual rate since 2010.
People only have so much available time to consume video content, and it is abundantly clear that more of it is being consumed online and on-demand. So, almost unequivocally, we can say that this almost has to effect viewership for the traditional media content makers.
But is the dramatic fall in so many of the major cable channel players warranted? I don't believe so.
There are several reasons I feel the drop in media stocks is actually a good buying opportunity instead of the "beginning of the end".
For one, quality produced content is still - by orders of magnitude - the most popular content for entertainment. Not cat videos, not 5 minute how-to videos, not 20 year old TV series. Consider this: according to a recent report, about 10% of Netflix's viewership watched its most popular show, House of Cards. That works out to roughly 6 million viewers. That would not even have gotten the show close to the top 50 this year, placing it at about half the viewership of such tantalizing programming as Hawaii 5-0 and The Mentalist. For this reason, I see growth in online as eating at the margins, and I believe for it to continue its current growth rates, the major studios will HAVE to be a factor going forward. That creates a growth opportunity for them.
Second, we're only considering one half of one part of most of these media firms. Affiliate fees continue to be strong, and in truth the overall magnitude of subscriber declines have not been substantial (under 2%). Viacom, Scripps, and Discovery are growing their international businesses. Viacom and Disney both have entrenched movie studios that produce content that cannot be duplicated by the likes of Netflix.
Third, we are talking about some historically low valuations on these stocks right now. Viacom's earnings yield is over 13%, where it hasn't traded since the recession days of 2009. Both Scripps and Discovery trade at over a 10% earnings yield, almost DOUBLE their 5-year average figure. A lot has to continue to go wrong to hold these names down.
My favorite choice right now in the group would have to be Viacom.
It is by far the cheapest, with a 10.7 P/E vs. Scripps' 15 and Discovery's 16.3. The stock has been pummeled almost twice as hard as the other two.
It has a top notch movie studio in Paramount, something neither Scripps or Discovery can boast. Much of its recent quarter revenue "miss" was due to movie timing, as Mission Impossible and Terminator both launched after the quarter ended (vs. Transformers, which launched in June last year). Paramount also has an extensive and popular back-catalog that can be monetized in new ways.
Finally, Viacom's two best properties, Nickelodeon and MTV, are designed to connect with the younger generations that are the most likely to cord cut. This gives the firm an opportunity to make that transition to new distribution sources - without losing viewers and with getting favorable deals from the distributors.
We like Viacom under $50 and think it is a good buy here. For more good buys, check out our top Magic Formula-style picks today!
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