The media sector faced a major setback as most stocks plummeted recently. Notably, the media companies are currently dealing with a crisis that has trickled down from the pay-TV sector, the distributor of the media content.
Over the last couple of years, the internal dynamics of the U.S. pay-TV industry have witnessed a gradual shift from cable and satellite TV operators to low-cost over-the-top service providers. The strong presence of online video streaming providers like Netflix NFLX and Hulu is posing a significant threat to the existing pay-TV business model.
Meanwhile, cord-cutting has become a serious concern for major pay-TV operators. However, the cord-cutting impact is now extending beyond cable companies, taking its toll on major media companies as well.
The Contagion Effect
Notably, a large chunk of media companies’ revenues come from affiliate fees paid by pay-TV providers to carry their channels and is calculated on a per-subscriber basis. With majority of the pay-TV operators gradually losing their subscribers, a contagion effect can be seen on media companies’ revenue growth from affiliate fees, which is going considerably downhill. Also, with their subscriber base already dwindling, the media companies are now no longer in a position to charge higher programming costs from the pay-TV operators.
Naturally, media stocks are witnessing difficult times, with the S&P 500 media index going down by 2.8%, recording its biggest two-day fall since Nov 2008. It seems sluggish revenue growth from affiliate fees and an increasing number of viewers opting out of cable or satellite TV service has set the sell-off in motion.
As a ripple effect, most of the media bellwethers have witnessed significant declines over the past two trading sessions. Notably, shares of The Walt Disney Company DIS fell about 11%; Viacom, Inc. VIAB lost almost 21%, Time Warner Inc. TWX went down by nearly 10%, Discovery Communications, Inc. DISCA fell over 9% while Twenty-First Century Fox, Inc. FOXA slumped 13%, over the past two days.
Internet TV to the Rescue
Internet TV is gradually gaining market traction in the U.S., with the legacy pay-TV industry in the country facing stern competition from online video streaming service providers. Internet TV has emerged as a strong alternative to counter this competitive threat providing viewers the flexibility to enjoy their favorite shows on mobile gadgets at breakthrough prices.
In Feb 2015, DISH Network Corp. DISH commercially launched its Internet TV service – Sling TV – across the U.S. In the same league, the U.S. division of Sony Corp. SNE has launched its PlayStation Vue Internet TV service. Comcast Corp. CMCSA is also set to foray into the over-the-top video delivery market with the launch of its Internet TV service – Stream. Verizon Communications Inc.’s VZ Internet TV offering is slated to launch later this year.
Not to be left behind in the race, AT&T Inc. T too has entered into a partnership with Chernin Group to offer similar services. AT&T recently acquired DIRECTV, the largest satellite TV operator in the U.S.
Thus, the media companies stand to benefit from the multi-year content licensing agreement with these Internet TV service providers to stream the former’s TV channels for their mobile video offerings.
Our Picks
Although the media sector is going through a rough patch, nevertheless, there are still a few well-positioned companies in the space. In fact, the recent pullback could make for a handsome buying opportunity if investors pick the right media stocks that still have great prospects.
Below, we highlight four such stocks which have been under pressure lately but could still be golden picks for investors. All these stocks have a favorable Zacks Rank and a good blend of value and growth characteristics, suggesting they are great selections for investors looking to make the most in the media space on this recent pullback:
Nexstar Broadcasting Group, Inc. NXST operates as a television broadcasting and digital media company in the U.S. It focuses on the acquisition, development and operation of television stations and interactive community Websites in medium-sized markets.
This Zacks Rank #1 (Strong Buy) stock has declined nearly 3.2% over the past month. However, the company has been topping earnings expectations lately with the trailing four quarters averaging at a positive 13.2%. In fact, not only does the stock have an impressive short-term thrust, it has seen solid activity on the earnings estimate revision front as well.
With 2015 and 2016 earnings estimates trending up, the stock holds substantial potential ahead. In fact, for full year 2015, EPS is expected to grow by nearly 11% and revenues by 39.7%.
AMC Networks Inc. AMCX owns and operates various cable television brands delivering content to audiences, and a platform to distributors and advertisers in the U.S. and internationally. The company operates in two segments, National Networks, and International and Other.
This Zacks Rank #3 (Hold) stock is currently trading at a relatively cheap P/E of 15.42x, a discount of about 14.1% over the industry average of 17.95x. Though the stock has dipped about 10.3% over the last four weeks, the company has delivered an average positive earnings surprise of 15.7% in the last four quarters.
In fact, for full year 2015, EPS is expected to grow by 30.2% and revenues by 16.6%. Moreover, 2016 earnings estimates are trending up, suggesting significant bullishness ahead.
Scripps Networks Interactive, Inc. SNI is the leading developer of lifestyle-oriented content for television and the Internet, where on-air programming is complemented with online video, social media areas and e-commerce components on companion Web sites and broadband vertical channels.
This Zacks Rank #3 stock has slumped about 12.8% over the last four weeks. However, a P/E of 13.19x suggests that the company is trading at a discount of about 26.5% over the peer group average of 17.95x. Also, the company has a Return on Equity (ROE) of 35.5% – a massive premium over the industry ROE of 14.8%. Moreover, the company has been topping earnings expectations lately with the last four quarters averaging a positive 12.00%.
Moreover, for full year 2015, EPS is expected to grow 11.7% and revenues by 8.6%.
Townsquare Media, Inc. TSQ operates as a media, entertainment and digital marketing services company in the U.S. It owns and operates radio stations, digital and social properties, and live events, as well as offers audience original entertainment, music and lifestyle media.
This Zacks Rank #3 stock with a P/E of 13.18x and a P/S of 0.34x suggests that the company is trading at a discount of 26.6% and 81% over the peer group average of 17.95x and 1.79x, respectively. Notably, the stock has dipped just about 1.6% over the last four weeks.
Moreover, over the last four quarters, the company has delivered a mammoth average positive earnings surprise of 746.6%.
In fact, for full year 2015, EPS is expected to grow a massive 419.4% and revenues by 15.9%.
The Road Ahead
Undoubtedly, the U.S. pay-TV industry is in the mid of a revolutionary change and the rapid acceleration in cord-cutting adds to the drama. Its ripple effect on the media companies call for dim scenario going forth. Moreover, the recent sell-off does ring further warning bells. However, at this juncture, the steadily growing Internet TV service market provides some respite.
So, investors should look to make the most from among media companies as the dip that some of the stocks in the space are experiencing today could actually make for a great buying opportunity. Our picks will surely help guide them through the bumpy market conditions and hopefully bring some glee amid the persistent gloom.
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