Traditional Entertainment Stocks Suffer in 2017
The prospect of more mergers and acquisitions provided a rare spark in the sector, but it wasn't enough to overcome investor concerns.
As anyone following Donald Trump's Twitter feed has been made aware, the stock market roared in 2017, though the president has ignored a glaring exception: movies, television and radio, collectively known as traditional media.
Out of the seven media-entertainment powerhouses, the stocks of Viacom, CBS Corp. and Time Warner ended the year lower, while shares of Walt Disney and Comcast managed gains but still underperformed the Dow Jones Industrial Average.
Sony Corp. and 21st Century Fox were the only two sector biggies that matched or outperformed the broader markets, but Sony was so beaten down from pervious years that it still sells for less than it did at the turn of the century. As for Fox, its gain in 2017 is entirely based on Disney's recent decision to purchase most of the company for a hefty premium.
Time Warner should have at least treaded water, as it is being acquired by AT&T, but the acquisition has been delayed while the two companies deal with a Justice Department lawsuit preventing the merger absent major concessions, so the stock fell.
For 2017, here's how the seven major conglomerates fared compared with the broader market:
Viacom: down 10 percent
CBS: down 6 percent
Time Warner: down 3 percent
Disney: up 5 percent
Comcast: up 17 percent
Dow Jones: up 25 percent
Fox: up 25 percent
Sony: up 60 percent
While the prospect of more mergers and acquisitions provided a rare spark in the sector, it wasn't enough to overcome investor concerns ranging from cord-cutting and falling TV ratings to the future of the box office.
As to the latter, the theater chains mostly took it on the chin in 2017: AMC Entertainment fell 53 percent, Imax sunk 26 percent, Cinemark was off 6 percent and Regal Entertainment managed a 17 percent gain. National Cinemedia, which runs those advertising promotional videos ahead of the trailers at movie theaters, saw its shares sink 48 percent.
Radio fared even worse, with Entercom Communications (which recently bought CBS Radio) dropping 25 percent and talk-radio giant Salem Media also falling 25 percent, while Cumulus Media lost nearly all of its value as it struggles for survival amid crushing debt. And iHeartMedia isn't much better off than Cumulus.
In digital radio, Pandora Media sunk 63 percent but Sirius XM Radio rose 22 percent.
Overall, of the 50 entertainment and media stocks tracked by The Hollywood Reporter, 36 of them underperformed the Dow Jones, and streaming video powerhouses Netflix (up 56 percent) and Amazon (up 56 percent) once again saw their stock prices soar, as did new-media giants like Google (up 36 percent), Facebook (up 54 percent) and Alibaba (up 97 percent).
Also in the digital realm, video-game stocks did well in 2017, with Take-Two Interactive Software soaring 123 percent, Activision Blizzard up 77 percent and Electronic Arts climbing 34 percent. Even Zynga, the maker of Words With Friends and other free games people play on their mobile devices, climbed 55 percent after a few years of disappointing results.
One new stock, Roku, soared 120 percent in 2017, while another, Snap Inc. (the parent of Snapchat) fell 40 percent.
A traditional media company that gained ground in 2017, even while not beating the Dow, was Charter Communications (up 17 percent) while Lionsgate Entertainment (up 26 percent), Live Nation Entertainment (up 60 percent) and World Wrestling Entertainment (up 70 percent) were among the few to best the Dow.
Heading into the latest earnings season, RBC Capital Markets analyst Steven Cahall said that "media sentiment is especially weak," adding that many on Wall Street consider it "dead money" to invest in shares of companies focused primarily on traditional movies and TV.
"It comes as no surprise that ratings and subscriber loss remain under the microscope as they're seen to have the biggest impacts on the stocks' terminal values," Cahall says.
Even the NFL isn't helping an overall slide in TV ratings. Sunday Night Football, for example, fell 13 percent in 2017 versus 2016, as a debate still rages as to whether part of the blame falls on highly publicized protests among players.
Analyst Shawn Quigg of JPMorgan predicted midseason that the controversy would cause shares of CBS, in particular, to fall. "NFL-related revenue is not trivial to CBS, and any decline in NFL viewership related to the National Anthem debate may negatively affect future results," he said.
Most on Wall Street think it is M&A chatter that will undoubtedly fuel a turnaround next year in media stocks, if a turnaround is in the cards.
"M&A continues to dominate the headlines and stock movement for the group," Jefferies analyst John Janedis said in a report just before Walt Disney made its mega-deal for Fox official.
"While we continue to be cautious on the media sector as a whole, we think that M&A speculation will overrun the very weak near-term fundamentals," said MoffettNathanson analyst Michael Nathanson.
But how long can the boost from the current investor obsession with deals last?
"We remain concerned that incremental buying of media shares in aggregate will lack follow-through as we believe advertising revenue outlooks and results will see another round of downward revisions in 2018," Guggenheim Securities analyst Michael Morris wrote in a report this month.
One event everyone on Wall Street expects for 2018 is the rollout of direct-to-consumer services, as Disney is doing with two new streaming services, one for ESPN and another for entertainment content, and CBS and HBO have done with CBS All Access and HBO Now, respectively.
“Almost every company we talked with was focused on building their own direct-to-consumer, over-the-top service to enhance their current linear models,” Nathanson wrote after recent discussions with several Hollywood executives. “In this new world, to paraphrase Jeffrey Katzenberg, content is not king, the platform has become king with content as king-maker.”
Added Nathanson: “Winners in media in the years ahead will not necessarily be the companies with the best shows, but rather those that can build a user interface that creates an intuitive, consumer friendly, well priced reservoir of constantly refreshed original content and deep library programming.”