We interrupt your regularly scheduled edition of Schwab Sector Views to let you know about an exciting development in entertainment: Are you tired of having to subscribe to a patchwork of multiple services to see the programs you like? Are you tired of having to wait for shows to load and buffering problems? Are you tired of missing out on live sports and local news? What if I told you you could drop all that in favor of a service that bundles all of the channels you want, including live sports and local channels? It comes on instantly and allows you to seamlessly move between shows with the simple touch of a button… How lucky are we to live in a time like this?!
OK—a bit of sarcasm to make the point that despite all the talk you might hear about “cord cutting” and the changing media landscape, investors may want to think twice about dumping all the “old” media stocks from their portfolios. In fact, in some cases, much of the near-term bad news may be priced in already and could even provide some potential opportunities.
With this article following close on the heels of my piece about why retail isn’t dying, you may be wondering if a defense of the horse-and-buggy industry could be next. The answer is no, although given the traffic in some of our cities…
My point is that just because an environment is changing and evolving, it doesn’t necessarily mean that some of the legacy participants won’t succeed in the new environment. And there are reasons to believe now may be a good time to take a look at the media industry for potential investments from a value perspective.
Here, I should thank BCA Research for their work in compiling some of the data that will be referenced below. In fact, we’ll begin with the BCA Ad Spending Indicator, which has tracked media groups’ earnings revisions pretty closely and is now moving nicely higher. This has tended to be a positive sign for stocks in the group.
In an environment where many companies are struggling to gain or maintain pricing gains, it may be surprising to learn that we’re seeing signs of some pricing power in the cable and satellite area, as you can see in the charts below.
And within the media group, we can see some attractive valuations, with the movies and entertainment area trading well below its historical mean on a forward price-to-earnings basis relative to the S&P 500, according to BCA Research. The media industry as a whole is trading at a 25% discount to the broad market on a price-to-cash flow basis.
Elsewhere within the media group, we are currently in the midst of “upfront season,” where TV networks pitch their coming season’s content to advertisers in hopes of lining up advertising commitments ahead of time. We are coming off a relatively banner year for networks in general, as both the presidential election and the summer Olympics provided a boost in the low double digits over the year before for some networks, according to data from Pivotal Research Group. And while we likely won’t see such gains again this year, the picture isn’t as dire as you might expect. Pivotal Research Group still expects pricing to improve in the mid-single digits—not bad in this low-inflation environment. And according to Advertiser Perceptions, 34% of buyers expect to increase their advertising on broadcast networks, while 32% expect to increase spending on cable. Only 14% and 12%, respectively, expect their spending to decline.
One of the reasons we’re hesitant to sound the death knell for traditional media is the mounting concerns among advertisers (again according to Advertiser Perceptions) over the effectiveness of advertising in the newer digital areas. It is difficult to measure the effectiveness of such advertising at this point, making it tough for companies to determine if they are getting value for their spending. There are also concerns about “brand safety” in cases where advertisements for certain products have appeared alongside content that their customer base may find objectionable. We’re not saying that the digital arena won’t continue to get advertisers’ attention, just that there may be some good reasons for companies to stick with TV.
Finally, at the heart of media, which is in the consumer discretionary sector, is the consumer. There is no doubt that the consumer has more choices regarding how to consume media than ever before. But as consumers mature, and networks and providers evolve, we could see more of a balancing process between digital and traditional. Wage gains are improving, which should give consumers more money to spend on media, while housing formations are trending higher, which could make more traditional forms of media a bit more attractive in our view.
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