Dixon's Take: The Three Key Stories for Media Investors in 2012
As the UBS Media Conference gets underway in New York, one insider shares his expectations and suggested strategies for the coming year.
The good news is that stronger balance sheets, high levels of free cash flow and current valuations have set the stage for steady stock appreciation if consumer spending slowly improves and as (and if) the economy recovers. (A signal provided by Zenith, Magna and Group M's December 5 projected outlooks for 2012 advertising ). Disney's (DIS) recent announcement to increase its dividend while raising debt, coupled with ongoing share buy backs at Viacom (VIA) underscores the story, and is good news for slow and steady long-term buy-and-hold investors.
Yes, there will be the inevitable shocks resulting from the rumor de jour, outrageous management practices and over-the-top hype, but for investors, that represents opportunity. As long as the fundamentals are strong, using those shocks to add to positions in the core cash flow positive names makes sense, since the major companies usually revert to valuation norms. Look what happened to Yahoo (YHOO). Given up for dead in August, the stock is up over 50% as bankers circled the wagons and found several investors who recognized the value of a media brand reaching half a billion viewers a month.
With current multiples between 6-8x trailing 12-month EBITDA, the larger companies are trading well below the 10x times historical benchmark, which given steady demand for entertainment and information in an increasingly global digital world strikes me as an anomaly.
It also leads to the big question about the impact of developments in digital technology on legacy media business models. Time Warner's (TWX) appointment of the former head of Digitas to head the company's publishing division underscores the issue and will bear further watching. If Time, People and Fortune can adapt to the emerging digital world and become as ubiquitous on Kindles (AMZN) and iPads as in doctors' waiting rooms, the tables will have turned, setting the stage for a new earnings growth spurt for old fashioned brands with a fully expensed cost structure.
The most interesting conundrum is in cable. The case is simple. Will steady growth in online activity offset declines in video subscriptions? Will average revenues per user (ARPU) go up or go down? The answer to both is "yes". However the issue will really be what happens to margins, and this is where Apple TV enters the picture.
The technology tom-tom system is predicting a new Apple TV for launch at year-end 2012, and the recent sales of Smart-TVs by Samsung, Sony (SNE) and others should make significant inroads in helping consumers to shift how they view video. The good news is that as these devices take hold, they will displace cable boxes as we know them, resulting in significantly lower costs and lower capital needs for cable operators over time. Thus the real question in the shift from broadcast to internet delivery of television is whether or not a combination of declining prices and rising margins will result in growing cash flow for cable companies who provide broadband services to folks who give up their video subscriptions. At this juncture, I think cash flows will improve, but the street and financial reporters will focus on weakening top lines and declines in video subscribers, which can provide an opportunity to build positions at Comcast and Time Warner Cable on earnings disappointments. It may take a while but as Google (GOOG) is going to learn in Kansas City, the broadband distribution infrastructure provided by fiber is the optimum way to provide state of the art video to homes and offices, and few companies are as well positioned to benefit from the long-term shift to digital distribution than the cable companies.
Which brings us to content. Outside the film business, which is struggling with an out-of-control cost structure, the emergence of new IP-delivered distribution systems has been terrific for television libraries and branded networks. In my view, Netflix has basically displaced the old time television movie syndication model, and provided a second life for 20th century movie libraries. Importantly when combined with easy to use on demand systems, consumers are finally shifting to the a la carte model heralded in the mid '90s. Once again the jury is still out as to whether the digital nickels will offset analog quarters, but at this point most cash flow is incremental and completely additive to earnings, as libraries were written off years ago. So once again, although earnings growth may slow, free cash flow will continue to build.
Adding to the confusion this year will be an unbelievable election year. The Supreme Court ruling to treat corporations as individuals can provide significant cash for candidates seeking elections and for PACs looking to make sure their positions are heard. Mr. McCain and Mr. Obama spent over $450 million in 2008, with total spending by all candidates approaching an estimated $3 billion. This year's cycle can be a real boon for station groups located in key swing states, as well as for network operations at News Corp (NWS), Disney (DIS), Comcast (CMCSA), CBS (CBS) and Time Warner.
So, 2012 is shaping up as a terrific year for media. After 15 years of hype, the digital world is upon us. Ongoing concerns about piracy, overpaid executives and the impact of new entrants will continue to impact stocks, but the core competency of creating audio video entertainment and information will accrue to US-based powerful brands that adapt to the digital age and seek to drive down aggregate costs by contracting and partnering with new entrants. That is essentially the next phase of the story – digital is as much about cost reduction as new sources of revenue. 2012 will tell the tale and this week as I sit through three days of back-to-back presentations, I'm listening to hear how cost structures are poised to change, who best understands their consumers and which companies have used the past few years to clean up their capital structures, setting the stage for multiple expansion as the economy and the consumer continue to slowly improve over the next several years.
Editor's note: Chris Dixon was Global Media Strategist for UBS and PaineWebber and the executive producer of the UBS Media Conference from 1991 to 2002.
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