Most media stocks posted double digit gains in the first quarter and year to date. In our view, the valuation lift has been on a wave of optimism regarding taxes, the economy, and even deregulation. But, the very near term fundamentals do not seem to be as robust as the stock prices might suggest. We believe that the first quarter results likely will be perceived as being lackluster. With valuations extended and many media stocks near 52 week highs, we believe that there is room for consolidation. As such, we would look for possible pullbacks related to disappointing very near term fundamentals as an opportunity to build positions in our favorite media names. We hope that you will look for updates on the industry and be with us in Las Vegas for the NAB Media Finance Forum April 24 and April 25.

OUTLOOK - TRADITIONAL MEDIA

BROADCAST TELEVISION
The Broadcast Television stocks were up 12% in the first quarter 2017, building upon the strength in the fourth quarter. Near current levels, the TV stocks trade at 8.9x times enterprise value to our blended 2017/2018 cash flow estimates, or near the low end of historic 15-year valuations. We believe that stock valuations may hit a speed bump in the upcoming first quarter results. In our view, there was a lot of hope regarding the early rebound in advertising in March. With very little advertising in the months of January and February, March makes the quarter. But, we believe that the strength faded, which may cause some disappointment in what we believe will be a lackluster quarter. Investors likely will turn their attention toward an improving second quarter. In addition, we look forward toward the upcoming NAB Media Finance Forum to discuss the long-term opportunities for the industry, including deregulation, the new ATSC 3.0 broadcast standard, programmatic advertising, artificial intelligence advertising, and the impact of addressable televisions. Look for future updates.

BROADCAST RADIO
The Radio stocks added to gains in the fourth quarter, with a nice 23% market cap weighted increase in valuations in the first quarter. The biggest news in the industry last quarter was the announced merger with Entercom (ETM: Buy Rated) and CBS Radio (CBS: Not Rated). We believe that the merger will create an un-levered, large platform, radio company that will be investable for many institutional investors. The industry has been mired by two of the leading radio broadcasters, which have been burdened by heavy debt loads. Hopefully, a new force in the industry may be able to break through this mark on the industry with its compelling argument for a bigger share of the advertising dollars. We look for this question to be answered in the upcoming NAB Media Finance Forum to be held in Las Vegas. Despite research that indicates that radio audiences remain stable, even as other mediums have fragmented, radio has had difficulty breaking through to advertisers. We believe that the industry has investment merit and look forward toward several broadcasters to highlight operation strategies at the upcoming Vegas conference.

PUBLISHING
The publishing stocks have underperformed its media peers in the first quarter, down 5% as investors turned toward the momentum of the broadcast stocks. This is interesting because the fourth quarter results were in line to slightly better than expectations. In addition, investors seem uninterested in some potential favorable developments, discussed later. In our view, investors shunned publishing stocks due to management changes, absence of deal activity, and a slowdown in Digital Media revenues. Importantly, we believe that these issues should be assuaged as we move toward the balance of the second half. Companies, like McClatchy (MNI: Rated Buy), should benefit from the potential sale of CareerBuilder, which reportedly may be sold for $1 billion or more. This would be significant for McClatchy, given its 15% ownership, with proceeds that could equate to as much as $20 per share or more. In addition, we believe that both tronc (TRNC: Rated Buy) and Gannett (GCI: Rated Buy) are building upon solid balance sheets which provides room to augment strong cash flows with possible acquisition fueled growth. We believe that the publishing stocks are among the most under valued stocks in the media group. Investors are encouraged to participate in tronc's presentation at the NAB Media Finance Forum and in the AI Technology panel, which the company will play a role in. See you there!

OUTLOOK - INTERNET AND DIGITAL MEDIA

INTERNET & DIGITAL MEDIA
Both Magna Global and eMarketer proclaimed internet advertising to have exceeded TV advertising in 2016. Zenith Media believes internet advertising will surpass TV ad spend in 2017. It will be interesting to see what online ad spends final numbers are when the Internet Advertising Bureau (IAB) reports numbers in late April. Nevertheless, of the more than 20 publicly traded digital advertising companies we track, 4Q 2016 revenues increased a strong 26%, with full year revenues coming in up 25%.

The growth in internet advertising is certainly encouraging given several issues that surfaced in 2016, including concerns over ad fraud (i.e., bots masquerading as human beings), viewability, ad blocking, and fake news.

Despite some of these challenges, the outlook for 2017 continues to look promising for internet ad spend. Total internet advertising is projected to grow by 14%, driven by mobile ad spend (+35%), social (+26%) and search (+14%). Desktop advertising is expected to decline by 5%.

In the first quarter of 2017, stocks in the digital media, social media, ad tech and marketing tech sectors reflected this optimism, with all 4 sectors outperforming the S&P 500. Stocks in the digital, social, ad tech and marketing tech sectors were up 8%, 22%, 21%, and 20%, respectively, versus a 6% return for the S&P 500.

The first quarter of 2017 marks the first quarter since the first quarter of 2016 that ad tech stocks outperformed the broader market. Drivers of outperformance in the ad tech sector were Rocket Fuel (+213%), The Trade Desk (+35%) and Criteo (+22%). Historically, ad tech companies, whether public or private, pursued growth at the expense of margin with a goal of dominating their market segment. We believe ad tech investors have begun to place a premium on profitability, or at least a path to profitability. With all ad tech companies posting positive EBITDA in 4Q 2016 and most companies posting positive EBITDA for all of 2016, we are beginning to see ad tech companies demonstrate a clear path to profitability.

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