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Media Stocks Finally Catch a Bid!


Investors respond well to the final batch of this quarter's media earnings reports.

Media stocks finally caught a bid yesterday and it's continuing today. The bid coincided with the last day of earnings reports for the group. Viacom (VIA), AMC Networks (AMCX), and Walt Disney (DIS) each reported. Numbers were better than expected, but at the segment level I'd call each quarter in line with expectations. Commentary on the forward outlook was consistent with what other media management teams had already said. Fourth quarter looks good. Upfront cancellations are minimal and in line with historical trends for the first quarter of 2012. Scatter is positive but not as strong as it had been.

Scatter seems closely correlated with ratings performance. This indicates a more mature phase of the advertising cycle. The big question remains: Is the cycle maturing because of macroeconomic headwinds or have we just fully corrected and used up the tailwind from the turn off the large and abrupt cyclical downturn of 2008/2009?

How you answer that question dictates how you should approach investment in media stocks. Even after sharp rebounds the last two trading days from the August/October lows, the shares still trade at reasonable multiples, below long-term averages. Furthermore, media managements are showing more competence and commitment to expense control than ever before. Better management extends to capital allocation as well. Acquisitions are minimal while share buybacks and dividends are surging. CBS (CBS) and Viacom each massively increased their share buyback programs before the current programs had even run out. When asked why, management responded it was due to confidence in the business.

Ignoring cyclical issues, there is an argument to be made that valuations should be below historical standards given the impact of media fragmentation and rising competition from online video. I continue to maintain that those challenges are real but will play out more slowly on the business economics than many believe. Simply put, a nation of couch potatoes is lazy when it comes to media consumption habits and the generation that truly seeks out online video is, well, a generation away from driving industry economics. In the meantime, the rise of online video is creating a net new revenue stream for the industry (Netflix (NFLX) et al more than offsetting lost opportunity from DVDs and syndication). Finally, the passage of time is giving seemingly improved management teams an opportunity to adjust business models to the new competitive landscape.

To respect the uncertainty in the economy and a maturing although healthy ad environment, I am keeping my big media exposure below levels in place in 2011 prior to August's market meltdown. I am prioritizing positions more as even with my belief that U.S. economic data is looking better, I no longer want to rely on a rising-tide-lifts-all-boats view of the sector.

In order of preference, my favorite ad-supported big media stocks are: CBS, AMC Networks, Discovery Communications (DISCA), and Viacom. On the outside looking in and almost through the door is News Corporation (NWSA). Scripps Interactive (SNI) and Time Warner (TWX) are my least favored names.

Here is a recap of the last three earnings reports from the group:
  • Viacom reported better than expected results but the upside was at Paramount. The big news at Viacom was a massive increase in its share buyback and a timeline that seems to indicate it will slightly pick up an already aggressive pace. Viacom shares are also benefiting from clarity over the recent sharp slump in Nickelodeon's ratings. Management made a compelling case that Nielsen data is inaccurate. Given legitimate ratings concerns at other company-owned networks, this comes as a great relief. Viacom shares had been among the worst performers in the group since late July. Eliminating an overhand at the company's most important network supports a sharp rebound in its stock price.
  • AMC Networks reported better than expected results driven by expense control. The shares have moved up sharply since the report but I think that is mostly because the company is becoming prominent for investors now that its first public quarter is in the books. Management made a good case that it can control costs as it expands its original programming slate. This has been an ongoing concern for investors. A solid quarter when minimal original series were on the air bodes well for a booming for the quarter and early 2012 when the company's most popular programming is being shown.
  • Disney had good numbers after two consecutive quarterly disappointments. Theme park margins and another good quarter at ESPN were the highlights. There was also some progress at the loss-ridden Interactive segment that has been creating a lot of investor angst. I am a little cynical about Disney's beat as the company just lowered guidance last quarter but there is no denying that underlying trends in advertising, affiliate fees, program expenses, and theme park attendance, spending, and profitability improved.

Disclosure: VIA.B, AMCX, DISCK, and CBS are net long positions in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds. CBS and DISCK are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts.

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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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