Media Stocks Suffer Declines in 2018

New York Stock Exchange - Getty - H 2018
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With only a few trading days left this year, 31 of the 50 stocks tracked by The Hollywood Reporter are down for the year.

Even after Wednesday's huge day of trading on Wall Street — one where the Dow Jones index soared nearly 1,100 points — shares of most media companies are poised to close out the year in the red, with some suffering declines not seen since the Great Recession, from 2007 to 2009.

Indeed, with only a few trading days left this year, 31 of the 50 stocks tracked by The Hollywood Reporter are down for the year, and some of the ones focused on digital media have suffered the worse, including Facebook (down 24 percent), Snap (off 63 percent), Roku (down 41 percent), ComScore (down 53 percent), TiVo (down 35 percent) and gamers Electronic Arts and Activision Blizzard (each off 26 percent).

The S&P 500 fell 7.7 percent so far in 2018, and half the media stocks tracked by THR are faring worse than that benchmark index. Helios and Matheson Analytics, better known as the parent of MoviePass, which introduced consumers to the concept of movie theater tickets via subscription, is down more than 99 percent.

Luxury theater chain iPic Entertainment, which started to trade publicly in February, is off 83 percent, while giant-screen chain Imax lost 21 percent and AMC lost 5 percent. Bucking the trend among movie exhibitors is Cinemark, up 9 percent.

On the plus side, World Wrestling Entertainment is the stock to beat, having risen 141 percent on the heels of some TV distribution deals, and other notable gainers include Netflix (up 32 percent), Amazon (up 18 percent) and Live Nation Entertainment (up 14 percent). Sirius XM Radio is also in the black, up 8 percent, as is Pandora Media, up 67 percent, after the former invested in the latter.

Among the major entertainment conglomerates, Rupert Murdoch's 21st Century Fox has scored a 40 percent gain, courtesy of a bidding war between Comcast and Disney for most of its assets. Disney won, so it will purchase the Fox broadcast network and film and TV studio, as well as some other assets, for $71 billion when the deal closes in 2019.

Disney is flat on the year, Comcast is off 13 percent, Viacom is down 12 percent, AT&T (the parent of WarnerMedia) is off 24 percent and Sony is pacing the field with a 7 percent gain. CBS, which lost CEO Les Moonves amid sexual harassment claims, is down 26 percent.

"These shares have been either unimpressive or outright disappointments, especially in the second half," former entertainment stock analyst Hal Vogel, CEO of Vogel Capital Management says.

"I would characterize the performance of media stocks in 2018 as mixed to somewhat lackluster during a year in which the broader market indices have traded mostly sideways," CFRA Research analyst Tuna Amobi adds. "While trade tensions and Fed rate increases have weighed on the broader market, there have been renewed concerns in the media sector about secular pressures on the pay TV model and the cyclical underpinnings of potential weakness in certain advertising pockets."

Amobi notes that media companies also saw "a pungent reckoning on the #MeToo movement … ensnaring top executives and high-profile media personalities in companies such as Amazon, CBS, Comcast, Disney and The Weinstein Company."

Another notable success in the year is Discovery, which benefited from skinny bundle carriage deals and M&A synergies after the acquisition of Scripps Networks Interactive.

One broader stock trading trend that has also affected media and entertainment is an "overall market rotation towards value away from growth" stocks, according to Sanford C. Bernstein analyst Todd Juenger.

For 2019, expectations for media and entertainment stocks are "relatively modest," Amobi says. "While no recession is anticipated, there is a backdrop for slower GDP growth in an environment of rising interest rates that could further dampen the environment for stock prices."

Merger activity could remain relatively subdued, he warns, though Disney will divest the Fox regional sports networks it is about to acquire, and that could spark more activity.

Even some companies that benefitted from political advertising and hyper-partisanship in the era of Donald Trump's presidency couldn't sustain stock gains, such as talk-radio leader Salem Media Group (down 48 percent) and Sinclair Broadcast Group (off 28 percent), one of the country's largest owners of local TV stations with a news product that is often portrayed as an alternative to Fox News.

With 2018's carnage in mind, what entertainment stocks do analysts like going into 2019?

"The silver lining is the opportunities created," Juenger wrote in a year-end report. "If we have to name a 'favorite 2019 idea,' which it seems a lot of people want us to do, it would be Electronic Arts. The overall vitality of the video game sector remains robust, but [investors] worry more about competition (e.g. Fortnite). EA's sports franchises (two-thirds of earnings per share) are best insulated from that."

Juenger also likes video game firm Take-Two Interactive, "where fundamentals have been even stronger than high expectations, but the stock has sold off anyway."

The analyst also said he and his team continue to be "strong believers in Netflix, where the stock got weaker in the second half of 2018 even as growth trends got stronger."

Netflix, though, will see new competition in 2019 from a streaming product to be launched by Disney and another by WarnerMedia.

Meanwhile, Juenger has a "neutral" rating on Disney and is bearish on Viacom, Discovery and AMC Networks. "Those stocks (to different degrees) got bid up in 2018 despite underlying fundamental trends generally getting worse," he wrote in his year-end note.

Eric Wold, an analyst at B. Riley FBR, in early December recommended Imax's stock because the exhibitor "is not only the best positioned company to benefit from a strong film slate and box office outlook for 2019-plus, but would also have an even lower correlation to any possibility of domestic economic weakness than the remainder of the exhibitor group."