European Sector Stocks Review: ITV, Mediaset, ProSieben up Sharply After Three Quarters

 

LONDON – The stocks of big European entertainment companies, particularly TV networks operators such as Britain's ITV and Italy's Mediaset, have seen strong gains through the first three quarters of 2013.

Meanwhile, pay TV giants have seen diverging stock trends, while French conglomerate Vivendi and pan-European broadcaster RTL saw their stocks close the third quarter on Monday at about the same prices where they had finished 2012 amid recent questions about their outlook.

"European media has had a good performance," said Liberum Capital analyst Ian Whittaker. "The best performers have been the cyclical names, because there has been a more positive view on the economic outlook. And there is the general feeling now that … for those sectors that have ridden the storm, the outlook actually looks more positive."

For example, ITV and German broadcaster ProSiebenSat.1 have seen increasing percentages of revenue from non-advertising sources, such as their production arms.

"Share prices haven't been so great where the market is still struggling with the impact of structural change," said Whittaker. For example, French media and telecom conglomerate Vivendi's future asset portfolio and direction have remained somewhat uncertain, while U.K. pay TV giant BSkyB has seen increasing competition from the likes of telecom giant BT, Netflix and Amazon.com's LoveFilm.

And others have seen more limited growth. "Stocks of companies that are less reliant on growth in advertising revenues have done less well, but have still mostly outperformed relevant market benchmarks," Sanford C. Bernstein analyst Claudio Aspesi said in a recent report.

Here is a look at the performance of key European sector players:

Mediaset
The Italian media conglomerate, founded by Silvio Berlusconi, has seen its stock take a hit of more than 10 percent in recent weeks amid an intensifying political crisis, which has ended in Berlusconi's party's withdrawal from the coalition government.
But before that, the stock saw strong gains from its 2012 closing price amid a turnaround in TV advertising trends. Southern European broadcasters have seen cyclical benefits as the economy has bottomed out, "and they have taken out a lot of cost that won't come back in the rebound," Whittaker said.
Mediaset's stock had ended 2012 at €1.56, but closed on Monday at $4.07 (€3.00), up 92 percent.
Aspesi earlier this year downgraded the stock to "underperform," saying: "We continue to see significant downside to the stock due to a combination of stretched valuation, challenged fundamentals in the Italian and Spanish TV ad markets [and] considerations on Mr. Berlusconi's fading personal and political fortunes."

ITV
The stock of ITV has recently set all-time highs, causing analysts to debate its outlook. On Monday, the stock closed at $2.85 (175.30 pounds), up 67 percent since the end of 2012.
Whittaker recently boosted his earnings forecasts for the company and price target on the stock.
"ITV’s adjusted price-earnings [ratio] ... is at the low end of what you’d expect from an advertising recovery," he said. "But retransmission and other high-margin revenue sources are growing, and we think it should re-rate as its U.S. peers, such as CBS Corp., have done."
But Aspesi has taken a different approach to ITV's stock outlook, downgrading his rating to "market-perform," which is similar to other analysts' "neutral" rating. "Despite strong fundamentals, we do not see significant upside from here," he wrote in a recent report. While he and others have lauded the company's growth in non-ad revenue, he argued: "Despite our favorable view on management and the transformation plan, we believe the good news is widely understood by investors. We do not believe that the potential for net advertising revenue to surprise to the upside is sufficient to justify an "outperform" rating given an already stretched valuation."

Sky Deutschland
The German pay TV giant, in which Rupert Murdoch's 21st Century Fox owns a majority stake, has seen its stock rise 64 percent to $9.20 (€6.78) year-to-date. The gain came on top of a strong 2012 performance, which saw the stock nearly triple. 
Further elevating the stock this year have been continued subscriber gains and improving profitability trends.
"Sky Deutschland re-iterated its guidance of positive operating cash flow for full year 2013 and "strong growth" thereafter," UBS analyst Polo Tang said after the firm's most recent earnings. "Nevertheless, we see upside risk to full year consensus numbers."

Vivendi
The French conglomerate started off the year with weaker stock trends amid discussion about the group's direction. But since a recent statement that the firm would separate its media and entertainment assets from its telecom businesses, "the stock has gained a lot more interest," Whittaker said.
Vivendi has targeted to complete the sale of its stake in Maroc Telecom by the end of the year, but has now extended the process of finalizing the agreements. "Any delays to the process will be unhelpful for sentiment and delay cash returns to Vivendi shareholders," Tang said on Monday. "Separately, the longer-term strategy for the company remains unclear."
But the stock ended the third quarter with improved momentum. As of Monday, the stock was in slightly positive territory for the year-to-date period.

TF1 and M6
The stocks of the French broadcasters should be "entering a more stable phase," Whittaker said in a recent note that upgraded them. He now has a "buy" rating on M6 and "hold" on TF1.
"The improving sentiment towards France has been a catalyst for both stocks, and our view is supported by the expectation that the second half will be more stable," he wrote. "Given the improvement in the outlook for advertising, we take a more constructive view."
M6 shares were up 34 percent year-to-date as of Monday's market close, while TF1's stock was up 45 percent.
 
BSkyB
The U.K. pay TV giant, in which 21st Century Fox owns a 39 percent stake, has seen a stock price improvement of around 13 percent in the first nine months of 2013.
Competitive concerns about the impact of online streaming firms like Netflix and Amazon.com's LoveFilm, as well as telecom giant BT, remain front and center though. "Concerns about an escalation in the price war are likely to overhang BSkyB shares," Tang said recently.

ProSiebenSat.1
The German TV powerhouse has seen a 47 percent stock gain year-to-date driven by solid financial trends and a continuing focus on its newer production and other non-ad businesses.
"Results ahead, guidance increased," UBS analyst Tamsin Garrity said after the company's quarterly earnings report this summer. She continues to have a "buy" rating on the stock.
Deals have also driven the stock, such as the sale of the firm's Scandinavian business to Discovery Communications. 

RTL Group
The stock of the pan-European broadcaster ended the first three quarters of the year with a minimal decline.
But Whittaker has increased his price target and maintained his "buy" rating. He said that after recent gains, "we expect further momentum from improving outlook for fiscal year 2014 estimates in peripheral assets such as France and the Netherlands and further cash returns."
The firm has also sold such assets as its stake in Russia's National Media Group, while investing in digital businesses.

E-mail: Georg.Szalai@THR.com
Twitter: @georgszalai

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