September has been an interesting month for investors in entertainment and media stocks. The fall TV season began and Bank of America Merrill Lynch and Goldman Sachs hosted conferences. This year we also have a political season and quite a bit of macro news in Europe and the United States, highlighted by actions of the European Central Bank and the Federal Reserve.
My interpretation of the news flow for media and communications stocks was generally positive. Investors seemed to agree as almost all the entertainment stocks and many cable, telco, and satellite stocks have reached 52-week and multi-year highs in September. Some are making those highs today.
Besides a strong market at multi-year highs, I think the main driver of the upside in the shares has been the macro news. Conference presentations were generally bullish, but I found the tone to be somewhat cautious. The European Central Bank announced it would aggressively buy short-term debt of troubled sovereign nations. Without being named, Spain and Italy are the targets. Eliminating financing risk for these countries for several years reduces the downside from the sovereign debt crisis. Or at least it delays the downside. Less downside equals less risk which frees investors to take more risk and buy stocks with sensitivity to the global economy. Certainly, the big entertainment conglomerates qualify. The Federal Reserve more or less said it would maintain extremely loose monetary policy for as long as it takes the US economy to resume to normal rates of GDP growth and unemployment. Once again, this is a signal to investors to take more risk and seek alternatives to fixed income investments that will continue to provide virtually no return. Add in some hope that this even more aggressive monetary policy will work, and the outlook for the big, economically sensitive entertainment conglomerates looks more bullish.
Telco, cable, and satellite stocks benefited from these same macro factors, but they are much less cyclical businesses. Instead, they pay good dividends and are free cash flow stories. The longer interest rates stay low, the more value to the dividends and the stream of future (and highly predictable) free cash flow.
The conferences were generally bullish but I detected a note of caution in many management presentations. The caution was probably just conservatism given slowing economic growth over the summer and uncertainty about the election and future fiscal policy in the United States. However, there were some indications that advertisers are being cautious. No company lowered guidance, except for Disney
(NYSE:DIS) which had a rough summer at ABC. Nevertheless, I still heard commentary about it being too early to call for a strong fourth quarter advertising market with the new TV season barely launched. It might be me, but I remember greater bullishness at these conferences the past couple of years without the qualifier that it is too early provide a reliable forecast. One thing that has not changed is the very shareholder-friendly management of balance sheets and cash flows. Almost every management team across the entertainment, media, and communications landscape reiterated their commitment to returning cash to shareholders as dividends and share repurchases. Accompanying this talk was disciplined discussion of acquisition strategies.
Investors will always worry about the industry-specific risks – advertising, cord cutting, price competition, and capital spending trends. At the moment, however, shareholder-friendly capital allocation is at least as important to the bull case. Entering another quarterly earnings season, the seasonally important fourth quarter, and the presidential election, the bulls are in charge. For good reason.
This column was previously published by SNL Kagan on www.snl.com.
No positions in stocks mentioned.
Entermedia is a long/short equity hedge fund focused on media, communic=
ations, and related technologies. Steve Birenberg is co-portfolio manager o=
f Entermedia, owns a stake in the Funds' investment management compan=
y, and has personal monies invested in the Funds. CBS and Discovery Communi=
cations are widely held by Northlake Capital Management, LLC, including in =
Steve Birenberg's personal accounts. Steve is sole proprietor of Nort=
hlake, a long only registered investment advisor.
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