With Thanksgiving and third-quarter earnings in the books, Wall Street is focusing on holiday sales and the fiscal cliff. These two items will dictate sentiment toward media and communications stocks, with ad-supported media companies on the front lines. So far, the news on holiday sales appears pretty good.
The National Retail Federation notes that the number shoppers in stores and on websites rose 9% over the Black Friday weekend to 247 million. Spending per shopper rose 6% to $398 and total spending was up 13% to $59 billion. Retailers were very promotional as we have to come expect during the kickoff of the holiday season. Deals were offered earlier with many stores opening on Thanksgiving and seeing good traffic. Online retailers were at least matching in-store deals and offering many of their own promotions even before Cyber Monday.
One interesting new development is that Black Friday and Cyber Monday promotions appear to be holding for at least an extra week.
For ad-supported media companies, the strong start to the holiday season is good news. Retailers should be confident in their promotions and continue to advertise to get the attention of shoppers and motivate them to come to stores and log on to websites. This is true even if promotions are driving sales rather than profits.
It is possible that initial advertising was less strong as some retailers waited to gauge consumers' mood. Given concerns about the fiscal cliff and the much more bearish sentiment among corporate managers than consumers, this is possible. It could also explain some of early fall sluggishness in advertising trends noted on quarterly conference calls.
However, these same calls indicated a pickup in October consistent with expectations for a good holiday season. It will be interesting to see whether the fast start to holiday sales and the extension of promotions through November (Thanksgiving was early this year providing an extra week of shopping for the month) are pulling forward holiday sales. This could result in a fast start before the entire season settles into a plus 3%-4% gain that most analysts are expecting. Should sales slow sharply in early December, the headlines will grow concerned, hurting sentiment for ad-supported media companies. For now, however, the early returns suggest investors take a bullish tone toward the holiday season for the owners of ad-supported media.
In communications, the early data is harder to read. The surge in online sales, with consumers buying using their tablets and smartphones, clearly shows the value of the wireless and wireline networks owned by major communications companies. In addition, tablets and smartphones are among the best selling items so far this season. This means the use of networks will remain high and the number of subscribers on data plans will grow benefitting wireless and wireline networks.
One cautionary note is that networks could need more upgrading, increasing capital spending needs and hurting free cash flow. AT&T’s
(NYSE:T) recent announcement that it would up spending to extend its U-Verse and 4G networks was greeted rudely by investors.
Booming smartphone sales also means that Wall Street will worry again over subsidies for new smartphones and the impact on margins. Tighter upgrade policies and lengthening smartphone replacement cycles have improved the long-term outlook for wireless providers. The big upside for wireless providers will come if they can maintain discipline and hold margins this quarter with high-end smartphones from Apple and Samsung dominating holiday sales.
The bottom line is that early holiday sales trends look good for bulls on media stocks. Communications stocks are too early to call, but there are some hopeful signs for the long-term value of wireless and wireline broadband networks.
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, communications, and related technologies. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in the Funds’ investment management company, and has personal monies invested in the Funds. CBS and Discovery Communications are widely held by Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a long only registered investment advisor.
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