Amidst the flood of bad financial news swamping the TV industry in recent weeks, a number of major media companies are experiencing something few expected this year: a rally. The stocks of Disney, News Corp., EchoStar, DirecTV and Univision have shown surprising strength, posting gains between 10% and 30% for the year to date. Cablevision Systems is up the equivalent of 64%.
Says Comcast CEO Brian Roberts, whose shares are up 35% so far this year, “We're off to a great year, but you always start all over again tomorrow.”
Broadcasting & Cable's index of major media companies—The B&C 10—has risen 12.9% so far this year. By comparison, the Dow Jones Industrial average has increased just 4.9%, and the NASDAQ composite has dropped 5.1%.
However, the rally is a bit hollow—more like a mini-rally. On the distribution side of television, cable stocks have jumped 26.9%, while broadcast stocks are down 1%. Among the entertainment companies, the gainers are matched by the steep slide at Viacom and the continuing sag at Time Warner.
What's the difference between the winners and losers? For much of 2005 and part of 2006, investors seemed to be lumping media companies together. Cable operators with strong growth were treated the same as newspaper, radio and TV-station companies. However, as some companies have shrugged off the market and continued to generate strong operating performance, investors have started paying attention.
“Anybody who's showing any financial growth has had a bounce-back,” says Morgan Stanley media analyst Richard Bilotti. A portfolio manager specializing in media at one prominent money-management firm agrees: “People are buying anything that has momentum. That's why News Corp. is moving and Viacom isn't.”
At first glance, News Corp. seems to be hobbled by slow-growth businesses: film (revenues up 3% this year, predicts Bank of America media analyst Doug Shapiro), TV stations and broadcast networks (up 2%), and newspapers (up 3%).
The saving grace: the company's cable networks (up 24%) and overseas satellite TV (up 10%).
News Corp. enraptured Wall Street with its acquisition of MySpace, which is exploding with Web traffic.
Comcast's new fortunes are due largely to a change in investors' sentiment. For months, Roberts' stock languished even as the cable operator put up quarter after quarter of strong growth in revenue and cash flow, even though subscriber counts were soft. Other cable operators were adding hundreds of thousands of digital-phone customers each quarter, a performance Comcast would quite obviously have little trouble matching as it rolled out service this year.
However, investors feared phone companies' plans to counterattack the assault on their phone business by spending billions of dollars to push into the video business. “We had a frustrating period communicating our feelings for our core business with the negativity surrounding the sector,” Roberts says. “You're clicking out 25 quarters of double-digit cash-flow growth, and your stock is flat, basically.”
That anxiety seems to have simply evaporated. I mark this year's National Cable Show in April as the turning point. In investor conferences leading up to the convention and at the show itself, Roberts and other cable operators showed no fear of the telcos. They hammered home the strength of their operating cash flow plus sales of phone and high-speed Internet services.
The Comcast rally started that week and has continued, buoyed by Comcast's release of strong second-quarter results.
One issue that seems to have no obvious effect is stock buybacks. Bowing to the pleas of hedge funds and Wall Street analysts, media companies have spent billions of dollars buying back their own shares. Comcast has spent $2 billion buying back stock in the past two years and plans to spend $3 billion more. However, News Corp. has avoided the buyback fad, preferring instead to spend money increasing its stake in DirecTV and high-profile acquisitions like MySpace.
Further, plenty of others have poured billions of dollars into buyback programs and wound up on the loser list. Time Warner has spent $11.6 billion, but its stock has dropped. Clear Channel has spent $3.8 billion, and its shares are off 8%.
One financial game that has worked is Cablevision Systems' payment of a $10-per-share dividend to shareholders. The company borrowed heavily, then paid out $3 billion to shareholders as a tax-free dividend.
The primary beneficiaries are the Dolan family, who control the cable operator and collected hundreds of millions of dollars after aborting an effort to take the company private.
Does the mini-rally mean that laggard media stocks will rebound, too? Perhaps not. Investors are chasing revenue growth. Low-growth companies—particularly TV- and radio-station groups—aren't likely to catch Wall Street's eye until they find a faster revenue pace.
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