STREET TALK

Economic realities hamper high times for Spanish-language media stocks

Spanish-language media is one of the hottest segments of the industry, right? So why were the stocks of Spanish Broadcasting System and Entravision Communications — the major remaining publicly traded U.S. companies in the space since Univision Communications went private in March 2007 — languishing near their 52-week lows even before Monday's horror show on Wall Street?

Well, for one, most media and entertainment stocks outside of cable and satellite TV have been pummeled this year amid economic and advertising sluggishness. Their Hispanics-drawing peers might do better but aren't immune. Plus, Spanish Broadcasting has faced company-specific challenges that have held back financial momentum.

So it's been no dice this year for investors trying to ride the broader wave of growing Spanish-language media. And analysts have turned even more sour on them recently.

Miller Tabak analyst David Joyce in August downgraded his rating on Entravision from "buy" to "neutral" and cut his short-term price target on the stock by $3 to $8. He cited weak momentum across the radio industry, "with no upturn yet in sight."

Citi Investment Research analyst Tony Wible also sees no relief. "With recent ad-budget cuts by GM and Ford, we do not see this trend reversing in the near term," he said recently.

If that wasn't enough, Joyce later reduced his earnings estimates for Entravision's back half of 2008 "to reflect continued advertising weakness."

Although Joyce suggested that Entravision's stock could rise to $8-$10 in the longer term, he cautioned that "these levels necessitate an emergence from the recession and a rebound in auto sales and advertising, the timing of which does not yet seem imminent."

Entravision also has long been seen as an indirect play on Univision as the largest station-affiliate group carrying Univision and TeleFutura networks in 20 of the top 50 U.S. Hispanic markets. Also, Univision holds a small stake in Entravision.

But not even strong Univision ratings during the recent Democratic and Republican national conventions — when the network claimed the top spot in the adults 18-34 demographic — energized Entravision shares, clouded by those fundamental challenges.

"If the stock and advertising markets were not in poor shape, Entravision stock could have reacted well to the Univision primetime novelas' near-record ratings and viewership increases during the last week of August," Joyce suggested.

Wible argued that Univision has been a liability of sorts as its dispute with Mexican broadcast powerhouse Televisa has weighed on Entravision shares; their trial date is set for October, "although we expect and hope it will be settled before then," the analyst said. He also rates Entravision stock a "hold" and recently cut his target by 50 cents to $4.

Meanwhile, Spanish Broadcasting is only tracked by a couple of analysts beyond Joyce these days. Beyond economic woes, it has suffered from a lack of agreement on the role it should play in the industry.

Activist shareholders looking to boost the stock have tried to get chairman, president and CEO Raul Alarcon Jr. to sell or spin off parts of the company or shut down its Mega TV network, whose development has cost money. However, "Raul has had a vision of running a mini-conglomerate for a long time," Joyce said. Also, talent turnover and reprogramming on key stations in cities like Chicago have seen the company move into spending mode.

"They dropped the ball when it came to trying to retain some radio talent, so their core radio assets started to suffer ratings declines even before the recession set in," Joyce said. This has led to a recent increase in program and marketing costs.

Despite the current bearishness with Spanish-language media stocks, you might want to keep an eye them over the medium term. If you read Wall Street reports and projections closely, you'll find that most analysts still see strong fundamental value in the business of serving Hispanics with information and entertainment. In fact, most expect that the two stocks could eventually rise significantly — even though nobody seems to be able to predict exactly when.

Georg Szalai can be reached at georg.szalai@THR.com.
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