Entertainment Stocks Mostly Lag After Three Quarters

Viacom newsletter - H - 2016

"Even as modest positive signs have emerged, media shares have continued to struggle to find investor interest," says one analyst.

Big Hollywood stocks are generally lagging the broader markets at the end of the third quarter. 

Through the first nine months of the year, the S&P 500 is up 6 percent, but the majority of the 50 entertainment-media stocks tracked by The Hollywood Reporter have not kept that pace.

The seven major conglomerates are a bit of a mixed bag, with Disney down 11 percent, 21st Century Fox shedding 10 percent and Viacom off 5 percent. The gainers: Sony is up 35 percent, Time Warner rose 26 percent, Comcast is up 20 percent and CBS is up 17 percent.

"Even as modest positive signs have emerged, media shares have continued to struggle to find investor interest," Guggenheim Securities analyst Michael Morris wrote in a recent report about the sector at large.

"Our large-cap universe trades at a [roughly] 25 percent discount to the S&P 500 ... despite steady revenue growth, above-average profit margins and low capital intensity," Morris wrote. "We believe investors fear a negative terminal value impact from new technology and audience fragmentation."

Disney got a small boost Friday when rumors spread it was considering an acquisition of Netflix, which also sent shares of the streaming service higher. Still, Netflix shares are off 14 percent so far this year.

One of the biggest movers the past couple of weeks is Twitter, which also got a boost from rumors that Disney (or Microsoft) were interested in acquiring the popular social-media outlet. But even with a big end-of-quarter surge, the stock is slightly down over the past nine months. Disney has been one of the biggest laggards this year in the Dow Jones industrial average's group of 30 stocks.

Elsewhere in new media, Electronic Arts is up 25 percent through the first three quarters, Amazon.com is up 24 percent, Activision Blizzard is up 15 percent, Apple is up 9 percent, Google is up 3 percent and Take-Two Interactive Software is flat. 

One of the market's brighter spots is the movie-exhibition sector, where Carmike Cinemas is up 43 percent, Regal Entertainment is up 20 percent and Cinemark is up 17 percent. Imax, though, is down 18 percent.

Sector stocks took a beating during the first half of the year amid investor concerns about cord cutting, ratings trends and the advertising market outlook, but some big names — most significantly, Time Warner — were propped up by deal speculation. Also, Viacom and CBS are considering a merger, though investors don't seem to know which company might benefit more from such a transaction, or what a premium to their existing stock prices might be if one should purchase the other.

MoffettNathanson analyst Michael Nathanson this week put it even more bluntly. "The media industry is now collectively trading at an 80 percent relative discount to the market multiple, which is the lowest relative level since 2008. However, we are not expecting to see a similar dramatic sector-wide rebound [as] post 2008 as we strongly believe this time is different. Instead, stock performance will diverge by the quality of content, brands and asset base." His conclusion: "Either you are live and large … or dead."

Citing audience fragmentation and increasing digital viewership, he explained: "The biggest near-term challenge will be the amassing and holding of large, live viewership that can’t be replaced by SVOD, DVRs, VOD, or digital. Stand-alone cable network companies (Viacom, AMC Networks, Scripps Networks and Discovery) will continue to be challenged. Media companies with strong brands in sports and news, which are fundamentally live, like Disney, Fox and Time Warner, will be rewarded with increasing affiliate fees and ad dollars."

As a result, Morris downgraded his ratings on shares of Discovery Communications and Scripps Networks Interactive to a rare "sell." He rates AMC Networks, CBS and Viacom "neutral," and has "buy" ratings on the stocks of Walt Disney, Time Warner and 21st Century Fox.

Among big-name entertainment stocks, Viacom is down 5 percent year-to-date as of Friday. The stock has struggled amid weak financial trends due to ratings and advertising challenges and film disappointments, governance conflicts and a lack of clear signs of a turnaround. The company also recently cut its dividend by 50 percent and said interim CEO Tom Dooley would depart.

Pivotal Research Group analyst Brian Wieser last week cut his price target on Viacom's stock by $7 to $40 in a report entitled: "Bad to Worse." He wrote: "With news that Viacom’s interim CEO would not continue in his role beyond mid-November and a reduction on earnings guidance, a uniquely bad situation now looks even worse."

Telsey Group analyst David Eagan said the news is also an overhang for CBS Corp., which like Viacom is controlled by Sumner Redstone. Downgrading his rating on CBS to "market perform," he wrote, "With the news out of Viacom ... it would appear that a merger with CBS is likely." He added: "A Viacom merger is a mad real world."