Our Outlook for the Media Sector
We find some compelling investment opportunities among wide-moat media conglomerates.
We find some compelling investment opportunities among wide-moat media conglomerates.
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Most of the media companies that we cover get a healthy chunk of their revenue from advertising, so we follow trends in ad spending closely. For the most part, that trend wasn't a healthy one during the second quarter. According to data recently released by industry researcher TNS Media Intelligence, which excludes paid search, ad spending slipped 0.2% in the second quarter from the same period a year ago. Overall results were impacted the most by business-to-business magazines and newspapers, down 9% and 7%, respectively. The most significant bright spot was the 19% growth in Internet display advertising, which was even better than the 17% growth achieved during the first quarter of the year.
The second-quarter data highlights the continued shift in ad dollars from traditional media to digital media, a trend we've observed for a while and one that we expect will continue for some time. As a result, we recently made further cuts to the fair value estimates for most of the newspaper publishers and a handful of the radio broadcasters that we cover.
Valuations by Industry
Our average star rating for the entire media industry is 3.08, indicating that we think the overall industry is about fairly valued. We currently think media conglomerates are the most undervalued, while we believe radio companies are the most overvalued.
Media Industry Valuations | |||
Segment | Average | Median Price/Fair Value | Stocks Covered |
Broadcast TV | 3.25 | 0.97 | 4 |
Cable TV | 3.00 | 0.98 | 13 |
Media Conglom | 3.27 | 0.97 | 22 |
Publishing | 2.81 | 0.97 | 16 |
Radio | 2.75 | 1.01 | 12 |
Data as of 09-19-07. |
When looking at our media coverage universe, two of the companies with the greatest competitive advantages are also trading at attractive valuations. We've assigned wide economic moats to Disney (DIS) and Time Warner as each company owns outstanding brands, possesses unique and difficult-to-replicate physical assets, is legally protected by copyrights and trademarks, and enjoys worldwide distribution. We think each is well-positioned to capture ad dollars aimed at both traditional and digital media over the next several years and should generate outsized economic profits for the foreseeable future.
Media Stocks for Your Radar
In addition to the two wide-moat media conglomerates discussed above, we see compelling investment opportunities in a couple of pure-play Internet companies.
Stocks to Watch--Media | |||||
Company | Star Rating | Fair Value Estimate | Economic Moat | Risk | P/FV |
Time Warner | $25 | Wide | Below Avg | 0.72 | |
Disney | $40 | Wide | Below Avg | 0.85 | |
Yahoo | $34 | Narrow | Average | 0.78 | |
Monster Worldwide | $46 | Narrow | Average | 0.73 | |
Data as of 09-25-07. |
Time Warner
With some of the most prominent assets in media, including Time Warner Cable, Warner Bros., HBO, AOL, and Time Inc, Time Warner is one of the most diversified media companies in the world. With the uncertainty surrounding the future of media, this diversification will prove invaluable if one of its businesses underperforms or experiences a secular downturn. As a case in point, Time Warner Cable's 15% organic revenue growth helped offset revenue declines of 5% and 1% in the company's filmed entertainment and networks segments, respectively, in the second quarter. Going forward, we expect Time Warner Cable to be the main driver of profit growth for the firm, with strong contributions from the cable networks and AOL as well.
Disney (DIS)
The strength of the Disney brand has allowed the company to exploit its characters and franchises through box office and home video sales, theme park and resort attendance, and merchandising. The company has also aggressively built out its online presence, allowing its customers to consume additional content, play games, and buy more merchandise. However, the company's largest profit generator is its media networks, including ESPN, ABC, and the Disney Channel. While we anticipate solid performance in filmed entertainment, theme parks, and merchandising, we expect the media networks to account for the majority of the company's profit growth for years to come.
Yahoo
Yahoo ceding market share to Google in Internet search makes all the headlines, but there are a number of other reasons that have contributed to Yahoo's disappointing financial performance, such as: poor monetization of search queries, weakness in display advertising, and client losses. Despite popular opinion, Yahoo has been actively rolling out new products and making acquisitions to address these problems. Therefore, we expect Yahoo's financial performance to improve as more relevant search and display ads lead to improved monetization. We also expect Yahoo to attract new advertisers, as the company now boasts a new advertising platform and can offer its clients a variety of advertising products including search, premium and remnant display inventory, and mobile advertising.
Monster Worldwide
Revenue growth has slowed recently at Monster Worldwide's North American careers unit, but we think that's only part of the story. In our opinion, most of its growth opportunity lies in its international careers business, which now accounts for about a third of Monster's total revenue. It's apparent to us that earlier investments in Europe and Asia are paying off, evidenced by the 57% revenue growth the international segment enjoyed last quarter, along with impressive operating-margin expansion. We expect its international business will continue to generate lofty revenue growth and increased profitability. Also, new CEO Sal Iannuzzi has embarked on a significant restructuring plan, which includes plowing about half of the program's savings into increased marketing and technology spending, which is money well spent, in our opinion. We also think the long-term trend of growth in online recruiting in general bodes well for Monster.
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