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All Contents © 2019The Kiplinger Washington Editors
By Vince Martin
| July 20, 2017
The trend towards so-called “cord-cutting” continues to pick up steam. And that spells trouble for media stocks.
A report from analyst firm Moffett Nathanson argued that the first quarter of 2017 was the worst ever in terms of pay cable subscriber losses. Those subscribers are increasingly defecting to streaming services from companies such as Netflix, Inc. (NFLX) and Amazon.com, Inc. (AMZN).
And those defections have had a noticeable impact on media stocks. No less a titan than Walt Disney Co. (DIS) has seen its stock struggle due to weakening results at its ESPN unit. AMC Networks Inc. (AMCX) has the biggest hit on cable in The Walking Dead — one of the most profitable shows ever. Yet its stock is down 35% from mid-2015 peaks.
It’s a tough time for the media business, with viewership fragmenting and platform operators like Netflix, Amazon and even Hulu creating their own content. But there are stocks to buy in the space, even with those risks. Here are three media stocks to buy even in the new cord-cutting world.
Prices and data are from the original InvestorPlace story published on July 17, 2017. Click on ticker-symbol links in each slide for current prices and more.
CBS Corporation (CBS) isn’t immune to the cord-cutting threat. But it has defenses and a reasonable valuation.
The flagship CBS network remains the most-watched in America and it has been for nine straight years. The company’s Cable Networks, led by pay-TV network Showtime, drove one-third of operating income in 2016, per the CBS 10-K.
And it owned local affiliates — the Local Media segment — saw revenue increase 12% and operating income rise 27% in 2016.
All told, CBS seems to have enough strength to manage in the cord-cutting world. CBS All Access and Showtime Anytime both are posting strong growth numbers. Local media stations remain an integral part of so-called “skinny bundles” from Sony Corp (SNE), AT&T Inc. (T) and other providers. And yet CBS stock trades at just 12.5x 2018 analyst earnings-per-share estimates — a multiple that suggests earnings are about to peak.
Given CBS’ positioning, however, that looks far too pessimistic.
Gray Television, Inc. (GTN) owns affiliate stations across the country, including 38 CBS channels. Gray focuses on smaller markets, and in particular state capitals and university towns, citing favorable demographics.
Those demographics have kept Gray affiliate ratings stable, according to a recent company presentation, while ratings at CBS and other “Big Four” networks have declined over time.
Meanwhile, steady growth in so-called “retransmission revenue” — payments from cable operators to carry local networks — has boosted earnings so far. And proceeds from FCC spectrum auctions have been reinvested into purchases of additional stations to build out Gray’s portfolio.
There are risks here. Gray has a heavily leveraged balance sheet, and the pace of retransmission revenue growth should slow going forward. Local stations aren’t totally immune from cord-cutting, even if they should survive better than smaller cable networks in skinny bundles or ‘a la carte’ packages. But M&A activity looks likely to pick up, with the spectrum auction complete.
Regulators have cleared the way for Sinclair Broadcast Group Inc. (SBGI) to acquire Tribune Media Co. (TRCO), and Gray would be a logical target amidst further consolidation.
On its own, GTN stock still trades at a single-digit multiple to free cash flow. That in turn provides room for more upside as a standalone. Either way, GTN should gain going forward.
The actual operating business at DISH Network Corp (DISH) is undoubtedly in decline, in large part due to cord-cutting.
Subscriber losses have accelerated over the last few years. The company’s Sling TV streaming service hasn’t been close to enough to offset those losses. Revenues were flat in 2016, and declined year-over-year in the first quarter of 2017.
But what makes DISH interesting is its asset base, notably its massive spectrum holdings. While DISH spectrum isn’t at the quality or amount of that of Sprint Corp (S), it is still valuable. As the bidding war between Verizon Communications Inc. (VZ) and AT&T for Straight Path Communications Inc. (STRP) showed, acquirers will pay dearly for spectrum. And that leaves DISH, and its chairman Charlie Ergen, in an interesting position.
DISH has been mentioned as a possible merger partner for Sprint or T-Mobile US Inc. (TMUS). It’s rumored to be seeking a partnership with Amazon. Ergen himself seems to be looking to set the company up for a key role in the internet of things ecosystem.
Investors have lost some patience with DISH. Many expected the company to have monetized its spectrum by now. Meanwhile, FCC restrictions could lead to penalties if DISH continues to hoard those assets. But Ergen is incentivized to maximize shareholder value; he owns nearly half the company. And it seems that DISH still has many ways to win.
This article is from Vince Martin of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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