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Published: August 24, 2012 at 10:51 AM GMT
Last Updated: July 31, 2013 at 10:51 AM GMT
In a research piece issued last week, Nomura analyst Michael Nathanson addressed what he called "one of the most unusual periods in recent memory" for media stocks. In spite of weak ad revenues and a read-through to a softening domestic economy, media stock prices continue to drive higher. Nathanson sees three things supporting legacy media companies at this point in history:
1) a rotation out of other consumer discretionary stocks into media companies with specific and intact stories;
2) reliable and fast growing affiliate fees offsetting advertising weakness; and
3) the return of capital remaining a high management priority and EPS driver/stabilizer.
The Nomura analyst also believes that investors continue to reward media stocks for their shareholder-friendly capital-allocation strategies (capital returns represent on average 8% of total current market value). Looking ahead, he expects names with "mass, premium, and nonreplicable" content should continue to perform well. He expects good things for News Corp (NWSA), Disney (DIS), and Viacom (VIAB).
Janney's Tony Wible published an update on Time Warner (TWX) this week that focused primarily on the firm's efforts in original content. "We believe TWX will benefit from the growing need for content, new distribution partners, and programming investments that will help it monetize its content library," the media analyst wrote in a note to investors. He sees TNT's new lineup of originals like The Great Escape showing early signs of success. Wible also sees TWX benefiting from digital initiatives to monetize its content library. That said, the firm is more dependent on growth in its media networks, which are "threatened by weaker ratings and potential IPTV cannibalization". While's he's sticking with his Neutral rating on TWX shares, perceptive readers of his analysis can sense the analyst is warming up to the stock as he's witnessing early signs of improvement with its original programming.
AMC Networks (AMCX) reported a 2Q financial performance that came in ahead of the expectations of Barclay's media analyst, Anthony DiClemente. Affiliate fees increased 15% in the quarter and contributed to the upside. Ad growth may have come in a bit light, falling short of the analyst's 15% growth forecast, but is still ahead of most industry peers. However, he feels investors are going to instead focus on upcoming litigation of the VOOM lawsuit with DISH Networks. Given the facts and the value of AMCX's networks, DiClemente believes that the company is well-positioned for a favorable resolution. He's Overweight the stock and has a $48 PT.
It's a long, steep climb back for Facebook (FB) stock. We've come a long way from May, when investors couldn't get enough of the hottest tech IPO of the decade. Thing is, the stock has lost over 40% of its value and is now trading at all-time lows of $21 and change (versus the $38 it hit on May 18th). Was this just a case of overhyping the stock by underwriters and the sell-side? Time will tell, but the thesis for owning the stock may come under pressure this week as over 1.6 billion shares come off lockup and could hit the market in several stages, suggesting continued short-term downside for the stock before it begins its slow and challenging climb back up a steep hill. I agreed with several analysts prior to the offering who anticipated the stock would quickly reverse its early decline and make steady progress toward $70 (a good reason why I almost never make public stock picks). But instead the stock has been hit hard by unjustifiable missteps by underwriters and management, a GM debacle, increased visibility of revenue challenges, over-hype, continued declines of other "hot" Internet stocks such as Groupon and Zynga, and an overall growing enthusiasm on Wall St. for legacy media assets such as CBS, Disney and Time Warner. I remain convinced Facebook shareholders will be rewarded in the long-term but short-term prospects will be more impacted by insider sell-offs and management challenges than by long-term growth prospects. Netflix's Reed Hastings reportedly invested $1 million for 4,786 shares of Facebook stock in a vote of confidence, and once the next round of sell-offs drop the stock another point or two, we should see the bottom for the foreseeable future. Within the next six months, look for Facebook to enter talks to acquire one or more of the leading content-based legacy and digital media brands that can increase the social network's ability to monetize its global consumer reach.
Investors were left wondering What's the deal? when local commerce play, Groupon (GRPN) reported last week. The daily deals site's 2Q results came in a bit light. According to Credit Suisse analyst, Spencer Wang, part of the issue is that Groupon Goods — the company's generic retail site — is becoming a bigger piece of the story. "The less profitable and less differentiated business" accounted for over half of the $65M in Direct revenue in 2Q. Kevin Allen of Barclays thought 2Q was pretty "solid". The gross billings ($1.29B), revenues ($72M) and adj. EPS ($0.08) were inline with his firm's forecasts. But Allen's more concerned with the firm's forward guidance. Management provided 3Q revenue guidance of $580-$620M which mirrored consensus, but the firm's operating income forecast of $15-$35M was well below his $44M target. He sees GRPM investing more heavily in Europe in an attempt to spur growth. He's still bullish on the firm's long-term thesis of playing a big role in local commerce and he's sticking with his Overweight rating. But, he's also taking this opportunity to reset his price target to $15 (from $27).
All the hype of the past two years surrounding huge Internet stock offerings that subsequently took a nose dive will cause greater scrutiny of several IPOs planned by high-flying (and low flying) online media companies for the next couple years. A slowing ad market will compound market resistance. Analysts and underwriters will focus more on companies that have established and sustainable revenue models, limited competition, market leadership, strong marketplace relationships and technological advantages. Ironically, this describes the legacy media companies that Nathanson describes in his report, and portends a continuing shift of investors' priorities to media companies with strong positions in content.
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