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The year to date has been a tough one for investors in Hollywood giants, many of which haven’t kept pace with the rest of the market through the third quarter, which ended Friday.
Taking a closer look at the stocks of entertainment conglomerates and others in the sector, though, it’s increasingly a case of the haves and the have-nots, as RBC Capital Markets’ Steven Cahall put it in a recent report.
Judging from the performance, firmly among the haves this year, through the end of September, were video games and new media stocks. It’s a different story, though, for most television, movie and radio stocks.
Of the 50 stocks tracked by The Hollywood Reporter, the best performer through the first nine months of the year was Take-Two Interactive. The maker of the Grand Theft Auto video games notched a 107 percent gain.
Others that handily outpaced the 13 percent increase in the S&P 500 over the first nine months of 2017 include Chinese internet company Alibaba (up 97 percent); video game maker Activision Blizzard (up 80 percent); concert company and Ticketmaster parent Live Nation Entertainment (up 64 percent); and video game firm Electronic Arts (up 50 percent).
It’s difficult, in fact, to overstate the Jekyll-and-Hyde nature of the market, with nearly every digital-media company vastly outperforming the more traditional variety. Apple’s stock is up 34 percent through the end of September, Netflix shares are up 46 percent and Facebook is up 48 percent, for example. Even the stock of relatively small Words With Friends maker Zynga gained 48 percent.
Exceptions proving the rule were Twitter, up 10 percent, underperforming the gains made by the S&P 500, and Pandora Media, which lost 41 percent as Wall Street lost confidence that the digital music company would be fully acquired by a larger firm after Sirius XM Radio acquired a stake in it.
On the flip side were the Hollywood conglomerates, with Viacom shares down 20 percent through the end of the third quarter, the stock of CBS Corp. down 8 percent and Walt Disney and 21st Century Fox each off 5 percent.
Time Warner’s stock rose 6.1 percent as investors bid it up ahead of its expected acquisition by telecom giant AT&T, which has seen its stock drop 5 percent year-to-date.
Of the big conglomerates that will remain independent, only NBCUniversal owner Comcast and Sony Corp. were in the plus column through the first nine months of 2017, with the former up 12 percent and the latter up 33 percent.
A lackluster box office has been a concern for investors, analysts say. It is also demonstrated by the drubbing the big theater chains have taken this year: AMC Entertainment shares have fallen 55 percent, Imax has dropped 28 percent and Regal Entertainment has dipped 20 percent, for example.
But cord-cutting and the rising popularity of streaming video services have been a particular concern affecting big Hollywood stocks. While deal rumblings have propped up some stocks at times, analysts don’t see any change to these negative effects anytime soon.
“Media investors should continue to expect linear sub declines to continue indefinitely, and potentially accelerate on cannibalization,” Cahall said in his report. “We think those stocks with better virtual [pay TV] carriage and strong affiliate rate growth are likely to fair best.” And he added: “With sports and broadcast results also supportive of the ‘have’ group, we think investments in rights and direct-to-consumer platforms are decently justified.” The analyst therefore picked CBS and Fox as his “preferred names.”
MoffettNathanson analyst Michael Nathanson similarly wrote in August: “We are witnessing the intense bifurcation of viewing behavior into live and non-live buckets as viewers increasingly avoid syndicated TV shows, repeat films and, now, even original scripted cable content.”
Nathanson favors “buy”-rated Disney and Fox, but is “neutral” on CBS, Time Warner and Viacom, and he has a “sell” rating on AMC Networks and Discovery Communications (he is “neutral” on Scripps Networks Interactive, which Discovery agreed to acquire on July 31).
Many observers still see Viacom as among the more challenged, since the conglomerate has not been included in all streaming pay TV bundles. Plus, one of its core networks, MTV, has been battling lower ratings. But management has said it has been in talks about a low-cost, entertainment-only bundle of channels designed to keep younger consumers on pay TV, or bring them back.
Telsey Advisory Group analyst Tom Eagan argues, though, that with many entertainment-media stocks tanking this year, the “risk/reward profile has improved” for investors. But it may be too early for investors to jump back into big entertainment stocks, he cautioned, saying: “We’re not there yet. We still expect pressure on ad revenue from declining ratings and pressure on affiliate fees from pay TV consolidation.”
Disney shares were hit hard in early September when CEO Bob Iger reduced full fiscal-year earnings estimates. “Disney is still so misunderstood,” Wells Fargo analyst Marci Ryvicker wrote in a report. “And there is still so much consternation over the streaming apps — Disney more so than ESPN.” Disney announced in August it would create a streaming service for Disney and Pixar content — which is a blow for Netflix since it will not get an extension of that product. An ESPN streaming service is also in the works.
Ryvicker estimated that the streaming plans “could add an incremental $30 per share in our highest conviction model and $10 per share if we are being ultra-conservative.” She added: “We continue to believe Disney is the best long-term play in the space.”
Elsewhere in TV, with the share price down 22 percent since the start of 2017, UBS recently said it is no longer telling investors to sell shares of Discovery Communications. But analyst Doug Mitchelson is far from optimistic about the stock, lowering his financial estimates and cutting his price target from $25 a share to $23. It ended the quarter at $21.29.
Outperforming many of its larger peers, Lionsgate, which merged with Starz late last year, is up 24 percent so far this year.
While cable companies are finding it tough to keep their video subscribers, broadband internet access is still a growing business, which is one reason cable giant Comcast is performing better than its peers among the conglomerates.
And Steven Birenberg of Northlake Capital Management likes CBS, “with no cable networks to protect” in addition to a popular streaming service in CBS All Access.
CBS, he added, has “highly visible high margin revenue growth in retransmission fees, all supported by a shareholder friendly management.”
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