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business newsMedia Companies' Stellar Earnings Mean Little to Stocks
By
Steve Birenberg
May 17, 2010 9:40 am
This was even the case for companies who produced "beat and raise" quarters, including Time Warner, Viacom, and Discovery Communications.
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I’m pleased to be a new professor here at Minyanville. I've admired the community and its values as a subscriber and look forward to interacting with readers and professors. The following comments are meant to provide an overview of media stocks coming off first-quarter earnings. Keep in mind my perspective as a media, entertainment, and communications hedge fund manager with a long bias.
One of the oddities in specializing in media stocks is that most all of the companies report quarterly earnings within a tight two-week window including the last week of the first month of the new quarter and the first week of the second month. This means that I often listen to four or five conference calls a day for most of a two-week stretch. In fact, many mornings offer overlapping calls requiring me be on two lines at once. I get that media stocks have very similar business profiles and stock prices and fundamental trends have high correlation requiring a need for all the information to come out at once. But I wish the investor relations departments would coordinate a bit better!
The latest earnings season for media stocks is now about two weeks in the past. Even before the market turned lower, a pattern had emerged. Media companies would report better-than-expected or in-line results and the stocks would trade lower. Most companies showed upside at the revenue, EBITDA, and free cash lines built upon upside to key financial drivers including advertising growth, movie box office performance, or subscriber metrics like net additions or ARPU. In other words, from a purely fundamental standpoint, media companies reported excellent first-quarter results.
It hardly mattered to the stocks, many of which have traded down close to 10%. Granted, media stocks have been leaders with many up 100-200% since the March 2009 lows. Most stocks were trading at 52-week highs entering earnings season. With the benefit of hindsight, the expectations bar was clearly too high. This was even the case for companies who produced "beat and raise" quarters including Time Warner (TWX), Viacom (VIA), Discovery Communications (DISCA), HSN Inc. (HSNI), and Scripps Interactive (SNI).
Periods like this are tough if you’re net long. I take solace in knowing that value was built during the first quarter as evidenced by rising 2010 and 2011 estimates and numerous increased share buybacks or dividend increases. In the short run, that hasn’t done any good, but I’m confident that most media stocks will make new 52-week highs later this year if the US economic recovery remains on track.Assuming you have at least a neutral market outlook, I'd be buying most media stocks into recent weakness. My largest long positions include Liberty Capital Group (LCAPA), Virgin Media (VMED), Liberty Global (LBTYA), Viacom, Yahoo (YHOO), and Time Warner. I have significant net-long pair trades on the voting and non-voting shares of Discovery Communications and News Corporation (NWSA). By sector, cable stocks are my largest exposure followed by cable networks. Cable stocks were rocked recently by new proposed FCC regulations. I think that’s set up a great buying opportunity, given that the competitive environment has moderated and the long-sought-after nirvana of modest growth with high free cash flow being returned to shareholders has finally arrived. My other cable longs include Cablevision Systems (CVC) and Mediacom Communications (MCCC). Cable networks continue to offer the highest growth rates in media as advertising market share grows steadily and affiliate fees for leading networks remain on an upward trajectory.
On the short side, I’m mostly in ETFs. As noted, correlations in stock prices and fundamentals among media stocks are very high. In a strongly trending market such as the past year, it doesn’t pay to be long and short in the group. With the uptrend broken, I expect to increase my individual stock shorts over the next few weeks. Presently, my ETF shorts include IWM, SPY, EFA, EEM, PBS, XRT, and XLY. IWM provides high beta exposure offsetting the volatility in media stocks. EFA and EEM provide hedges against the substantial international exposure in the portfolio. PBS, XRT, and XLY are sector funds in the consumer discretionary space. Individual stock shorts include Time Warner Cable as a hedge on my cable exposure, Garmin (GRMN), and Lamar Advertising (LAMR). I also have option collars on in WMS Industries (WMS) and for part of my Liberty Capital Group position.
Keep that overview in mind as you read my follow-up comments in the coming days. I'll be briefer and stock- and trade-specific in the future. Take care -- and watch your favorite TV shows and hit the movie theater!
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Positions in LCAPA, VMED, LBTYA, VIA, YHOO, TWX, DISCA, NWSA, CVC, MCCC, IWM, SPY, EFA, EEM, PBS, XRT, XLY, GRMN, LAMR, WMS
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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