The general market as measured by the S&P 500 Index increased 3.8% in the second quarter, with Noble’s market cap weighted TV (+3.2%) and Radio (+3.5) indices finishing in-line with the S&P. Notably, larger cap stocks performed well, while smaller caps significantly under performed.

We believe that investors continue to follow momentum behind companies with significant M&A activity and are unforgiving for companies that miss quarterly expectations. A perfect example is the 27% drop in E.W. Scripps (SSP) shares from highs prior to its first quarter release to near current levels. In our view, at this stage, fundamentals matter. Investors seem unwilling to look too far into the future, even into 2020 when many media companies will get an influx of political advertising. Investors appear to be looking over their shoulders for a potential economic downturn, given the late stage of this economic cycle, now the longest economic expansion in our history. As such, investors seem to be focusing on liquid, large cap names and avoiding debt leveraged companies, which is typical in a late cycle. Positive news will send the stocks up, while negative news is disastrous. This is a trading mentality rather than an investing mentality. So, it is with some caution that we enter another quarterly release cycle.

There is reason to be cautious. M&A activity in traditional media has slowed somewhat in the broadcast TV sector as companies digest recently closed acquisitions. In addition, most companies face difficult comps from healthy year-ago political and auto advertising. While political advertising is expected to be significant in 2020 and may even help the fourth quarter 2019, given the large number of Democratic candidates and early primary voting, investors appear unwilling to look too far into the future. Currently, we do not see anything that is derailing the general economy and, as such, we do not think that we are looking over a cliff for the US economy or ad spend. As such, we remain constructive on the media sector, but we encourage investors to be selective and opportunistic. Some of our favorites that warrant particular attention are Entravision (EVC; Rated Outperform), E.W. Scripps (SSP; Rated Outperform), Townsquare Media (TSQ; Rated Outperform), and Tribune Publishing (TPCO; Rated Outperform).

OUTLOOK - TRADITIONAL MEDIA

TELEVISION BROADCASTING
Should investors be nervous about the second quarter?

In the latest quarter, TV investors followed the momentum. No other stock came close to the performance of Sinclair Broadcasting (SBGI), up a significant 39% in the second quarter. The second quarter performance added to the company's strong first quarter gains, and combined, Sinclair shares are up a whopping 104% year-to-date. Investors cheered the company's May 3rd announcement that it plans to acquire 21 Regional Sports Networks from Disney for $10.6 billion. But, is there a caution sign for Sinclair investors.

Companies that recently made acquisitions, added debt, and are in the process of integrating those acquisitions, under-performed in the latest quarter. Investors took profits in the shares of E.W. Scripps and Gray Television (GTN), which had among the best first quarter performances. Both of these stocks were among the worst performing in the sector in the second quarter, down 27% and 23% respectively. To be fair, E.W. Scripps missed first quarter expectations, with results complicated by the timing of consolidation of acquisitions. Nonetheless, television investors seem to follow momentum and deal activity. Disappointingly, with the poor second quarter performance, both E.W. Scripps and Gray Television have under-performed the S&P year-to-date performance, down 3% and up 11%, respectively, versus a 17% gain for the S&P through mid-year. Given recent acquisitions by both companies, it appears that there will be a lull in deal activity in the very near term. So, it is not surprising that deal momentum investors are looking elsewhere.

Nevertheless, we believe that investors may refocus attention on SSP and GTN shares as 2020 approaches. Notably, both E.W. Scripps and Gray Television are among the best positioned to benefit from the influx of political advertising in 2020. Scripps' stations are located in heavy "swing" states and should benefit from competitive governor's races in several markets. Gray Television over indexes on political advertising given its strong station ratings and operations in numerous state capitols where issue advertising is strongest. As such, we believe that the sell-off appears over-done and the shares should recover as investors refocus attention on 2020, possibly within the next quarter.

Perhaps an even more compelling investment opportunity in TV is in the shares of Entravision, which were down 4% in the second quarter. EVC shares have not recovered from issues related to its auditor change and missing financial reporting dates for its full year 2018 and first quarter 2019 results. While the company, like all television companies, faces difficult comparisons with the absence of the year earlier political advertising, Entravision's revenues are likely to be more stable in 2019 than its peers. This is due to revenue from multicast revenue and telecom deals that will largely offset political revenues from last year. Furthermore, the company should benefit from the influx of political advertising in 2020. Finally, EVC shares appear compelling, trading at a 20% discount to its peer group cash flow multiple, supported by a sizable $170 million in cash and marketable securities ($1.95 per share) and an attractive 6.3% annualized dividend yield. As such, EVC shares are once again our favorite for the upcoming quarter.

RADIO BROADCASTING
Will increased attention on reducing debt help the sector?

Radio stocks performed well in the second quarter up 3.5% versus a 3.8% gain by the broader market. However, Noble’s Radio Index is market cap weighted, and when we peel back the onion, shares of Entercom (ETM), which were up 11% in the quarter, and Cumulus Media (CMLS: Rated Outperform), up 3%, accounted for the overall performance of the industry. It is notable that Cumulus Media added 3% to its stock price in the second quarter following a very strong first quarter. Year-to-date, Cumulus shares are up a significant 72%, leading the radio pack. Cumulus has been aggressive in re-positioning its station portfolio, selling stations where it does not have the opportunity to create significant in-market penetration, or swapping stations to build upon its existing presence in markets. The additional positive from these actions is that the proceeds from the station sales are allowing the company to more aggressively reduce debt. In our view, the company plans to continue to re-evaluate its station portfolio and may seek acquisitions or asset sales to boost in-market penetration. By comparison, the worst performing stock in the quarter was Beasley Broadcast Group (BBGI), down 19%.

We believe that investors are likely to focus attention in the upcoming quarter on iHeart Media. Shares of iHeart Media have been approved for listing on the NASDAQ Global Select Market as of July 18, 2019 under the ticker IHRT. Consequently, management pulled the company's S- 1 filing for an initial public offering. We believe that the company's reorganization should help the entire industry. It appears that the top industry leaders including Entercom, Cumulus Media and iHeart, all appear to be tackling their heavy debt loads. We would expect that each company will be reviewing its portfolio, much like Cumulus Media, and may sell and/or swap stations to improve in-market penetration. In our view, these moves will help focus management on improving fundamentals rather than making decisions to service the debt.

We encourage investors to focus on Townsquare Media. Shares were down 6% in the second quarter, but were up a strong 32% through mid- year. Despite the strong year-to-date performance, TSQ shares trail the valuation of its peers. Notably, the company has some of the best fundamentals in the industry, with above average revenue and cash flow growth. This performance is derived from its leading digital media businesses. Currently, its digital businesses account for roughly 1/3rd of its revenues and has higher margins than its radio business. Its fast growth digital media business is expected to generate 50% of its revenues in a few years. This is far better than the radio industry overall, where digital revenues currently account for a modest 8% of revenues. We rate the shares of Townsquare Media as Outperform.

PUBLISHING
Time to look for value in the industry?

Noble’s Publishing Index under-performed the general market, an increase of 0.2% versus a 3.8% gain by S&P 500. However, only shares of large cap News Corp (NWSA) increased in the quarter. NWSA shares increased 8% and every other stock in the index declined. The next best performer was another larger cap stock, The New York Times (NYT), which was down a modest 1%. We believe that investors moved out of the sector given the lack of M&A activity and the failed prospective takeover attempt and proxy fight at Gannett (GCI). The poorest performer was McClatchy (MNI), which dropped by 48% in the quarter. The company is among the highest levered companies in the industry. We believe that investors are concerned about high debt leverage in a late stage economic cycle.

On May 3rd, we raised our rating on the MNI shares to Outperform based on stock valuation, the prospect of stabilizing cash flow, and improving debt leverage ratios. The company is re-evaluating its costs as it transitions to a digital future. Certainly, we believe that the company needs to assuage investor concerns over its large amount of debt. On that front, we believe that the company is on track to sell additional real estate assets, with the proceeds to be used to reduce debt. In addition, we believe that stabilizing cash flows will allow the company's leverage ratios to improve.

Investors are encouraged to also focus on Tribune Publishing (TPCO), despite declining by 32% in the second quarter as investors became wary that the company would not be sold in the very near term. The weakness in the shares were in spite of the better than expected first quarter results and management's better than expected Q2 and full year 2019 guidance. We raised our full year 2019 expectations. Near current levels, we believe that there is a valuation disconnect with the shares trading at 2.4 times Enterprise Value to estimated 2019 cash flow. Notably, the company has virtually no debt and $142 million in cash. We rate the shares Outperform.

OUTLOOK – INTERNET AND DIGITAL MEDIA

INTERNET AND DIGITAL MEDIA COMMENTARY
Q2 2019 – M&A Remains Robust in the Internet & Digital Media Sector

According to Mergermarket, global M&A in the first half of 2019 fell 11% to $1.8 trillion. However, beneath the surface the numbers show a notable shift, with M&A deal values decreasing by 39% in Europe and 32% in Asia, but increasing by 15% in the U.S. Concerns over global trade wars have resulted in companies turning inward and focusing on domestic markets. In fact, 53% of all global M&A value took place in the U.S., its largest share of global deal volume, as tracked by Mergermarket.

Within the U.S., M&A in the technology sector reached a new high, with growing demand by both private equity and strategics for technology companies, particularly in the data analytics and cloud services sectors. Within the internet and digital media sectors, Noble tracked 140 transactions in 1H 2019 vs. 127 deals in 1H 2018 (10% increase), and M&A values increased by 6% to $39.4B in 1H 2019 up from $37.3B in 1H 2018.

The largest deals in the internet and digital media sectors were Salesforce’s $16.3B acquisition of Tableau Software, and Publicis’ $4.4B acquisition of Epsilon Data. The Publicis/Epsilon deal follows on the heels of last year’s $2.3B acquisition of data provider, Acxiom, by Interpublic Group (IPG), another case of an ad agency acquiring a data business.

In terms of deal activity, the marketing technology sector was the most active, with 40 deals announced in 1H 2019, followed by digital content deals, with 37 announced deals. Notable deals in the marketing technology sector included Google’s $2.6B acquisition of analytics and business intelligence company Looker Data Sciences; McDonald’s $300M acquisition of personalization, recommendation and optimization company Dynamic Yield; Trax Technology Solution’s $200M acquisition of shopper marketing company, Shopkick; and Vimeo’s $200M acquisition of social video editing company, Magisto Ltd.

Notable deals in the digital content sector in 1H 2019 included deals in the OTT video and podcasting sectors. OTT video transactions include Viacom’s $340M acquisition of internet television provider, Pluto TV; and Altice’s $200M acquisition of live and on-demand internet video provider, Cheddar, Inc. Increasing deal activity also took place in the podcast sector with the catalyst being Spotify’s $196M acquisition of podcast network Gimlet Media; Spotify’s $154M acquisition of podcast platform Anchor FM; and Spotify’s $56M acquisition of podcast network Cutler Media.
With the market near all-time highs and the Fed signaling possible rate cuts in the coming months, we expect deal activity to remain strong, particularly as acquirers can finance acquisitions with highly valued equity as a currency or attractively priced debt.

Sector Performance: Three of Noble’s four internet and digital media sectors outperformed the S&P 500 in the second quarter of 2019. While the S&P 500 was up 4%, Noble’s social media (+16%), ad tech (+10%), and marketing tech (+7%) indices all outperformed the broader market, while our digital media index (-6%) underperformed the market.

INTERNET AND DIGITAL MEDIA COMMENTARY

Digital Media
Noble’s digital media index (-6%) underperformed the S&P 500 (+4%), led by an 8% decrease in shares of Alphabet (GOOG.L, -8%). Even the strongest returns in the digital content sector were tepid. No stock in the sector was up or down more than 10%. Shares in Spotify (SPOT) increased by 5%, while shares of Interactive Group (IAC) increased by 4%. Netflix shares appreciated by 3% in 2Q 2019, reflecting a consolidation of the 33% increase the shares experienced in 1Q 2019. The lack of follow through may also reflect increased competition in the direct-to-consumer video space. Netflix was wise to develop its own content. Disney recently announced the launch of Disney+ featuring 35 original series/movies and 500+ movies from Disney classic animated films to Marvel, Pixar and Star Wars film libraries. Meanwhile, a newly emboldened ATT, fresh off its acquisition of Time Warner Media, announced that it will move Netflix’s most popular TV show, Friends, from the Netflix platform to ATT’s new direct-to-consumer offering HBO Max in 2020. This follows on the heels of Netflix losing its second most popular TV show, The Office, to NBCUniversal’s forthcoming direct-to-consumer streaming platform, at the end of 2020.

Advertising Technology
Ad Tech stocks were the next best performing sector, up 10% in the second quarter, despite only half of the sector’s dozen stocks finishing up for the quarter. The strongest performers for the quarter were Social Reality (SRAX, +37%), Telaria (TLRA, +19%), Quinstreet (QNST, +18%) and The Trade Desk (TTD, +15%). Given that Noble’s indices are market cap weighted, The Trade Desk had by far the biggest impact on the sector. The Trade Desk’s market cap of $10.6B, is 2.8x larger than the combined market caps of the other 11 companies in the index.

Marketing Technology
Noble’s marketing technology sector finished the quarter up 7%, though only 5 of the sector’s 11 stocks finished up for the quarter. Performance leaders include Cardlyitics (CDLX, +57%), Brightcove (BCOV, +23%), Akamai (AKAM, +12%) and Adobe (ADBE, +11%). Like the ad tech sector, large caps seemed to significantly outperform their smaller cap peers. Laggards during the quarter included Marin Software (MRIN, -46%), and Sharpspring (SHSP, -19%), though Sharpspring was able to significantly expand and diversify its shareholder base through a $10M follow-on offering in March, followed by $27M secondary offering in June. Sharpspring shares finished the first half of the year up 3%.

Social Media
Social media stocks were strong performers in 2Q, with four of the five social media stocks in our index finishing the quarter up, led by Snap, Inc. (SNAP, +30%). Snap shares finished the first half of the year up 160%, having finished 2018 very close to its 52-week low. Shares of Match Group Inc. (MTCH) increased 19% in the quarter and are up 57% on the year. Despite intense regulatory scrutiny, Facebook (FB, +16%) performed well and shares are also up significantly year-to-date (+47%).