Newsletter Media sector review January 2016

January 2016

A rebound in media stock valuations in the fourth quarter 2015 was not enough to offset the declines earlier in the year, with the exception of the television group.


A rebound in media stock valuations in the fourth quarter 2015 was not enough to offset the declines earlier in the year, with the exception of the television group. Digital Media/Technology stocks declined 27% for the year as measured by the NOBLE Index, while the NOBLE Publishing Index declined nearly 35% and the NOBLE Radio Broadcasting Index declined 17% versus a modest 0.7% decline for the general market as measured by the S&P 500 Index. A strong 20% rebound in Television stocks in the fourth quarter allowed that group to ink an 8% increase for the year.
We believe that concern over a slowing global economy and falling oil prices was
to blame. Television stocks were somewhat insulated given the looming spectrum auctions that should bring a windfall to local broadcasters, but the stocks performed well below pasts cycles. We believe that the media valuations are very compelling given that the prospect of an economic downturn appears farther into the future and look for upside surprises as fourth quarter results are released. As such, we encourage investors to take advantage of the recent weakness in the media sector.


The Nexstar and Media General takeover saga culminated with an increased bid by the company, which we believe supports higher valuations for the television sector. In our view, too, investors who earlier shrugged off interest in the sector given the prospect for sluggish M&A activity, came back to the sector in the fourth quarter with an eye on the windfall from looming spectrum auctions early in 2016. Notably, the NOBLE Broadcast Index increased roughly 20% in the fourth quarter, which allowed the sector to post an 8% increase for the year. This increase is well below average stock performances the year prior to an Olympic and General Election year of roughly 23%. With a compelling fundamental outlook from higher Retransmission Revenue and Political Advertising, we believe that the Television Group should outperform the general market in coming quarters. In addition, we believe that investors may have underestimated the potential windfall from upcoming Spectrum Auctions. Consequently, we remain constructive on the Television sector.

The weak Radio performance was largely a reflection of a dramatic free-fall in the shares of Cumulus Media, which declined 92% for the year. Aside from this performance, the rest of the radio group performed relatively okay. As a group, the radio stocks declined 17% for the year, but had a relatively good fourth quarter, which was up 10%. Stock performance and Cumulus aside, we believe that the fundamentals of the Radio Industry are relatively good, with positive revenue trends. While the fundamental performance of Cumulus may cast a shadow over the sector, we believe that investors should look deeper into the sector for value. Our favorites include Entercom and Salem Communications.

The Publishing sector had a wild ride given high debt leverage and concern over a languishing U.S. economy in light of a Fed rate hike. A 21% increase in the Publishing Index in the fourth quarter could not offset the earlier declines and the NOBLE Publishing Index finished the year down 35%. We believe that investors have not fully appreciated the level of M&A activity that is expected in the industry, nor the opportunities that consolidation should accomplish in terms of improving margins. In our view, the October 2015 announcement that Gannett plans to purchase Journal Media served to accentuate the evolving consolidation narrative. We would look for more consolidation in 2016 which should drive multiples higher. Consequently, we encourage investors to take advantage of weak current valuations in the newspaper group.

The media technology stocks were the second worst performing sector in 2015, down 26.8% versus the general market as measured by the S&P 500, down a modest 0.7%. While certainly negative, we were encouraged by the stocks’ performance in the fourth quarter. Notably, the media technology stocks outperformed the S&P 500 in the fourth quarter 2015, up 16.5% versus a gain of 6.5%, respectively. We believe that the improved performance was related to better than expected results from some of our closely followed companies. SeaChange’s shares, for instance, increased 6% in the comparable fourth quarter. The company has now beat expectations for the past three quarters and returned to operating profitability for the first time in seven quarters, a quarter ahead of plan. Given compelling growth prospects, we selected SeaChange as our favorite pick for 2016.

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