LOOKING IN THE REARVIEW MIRROR

Notably, media stocks outperformed the general market in that quarter despite this forecast. Now it seems, the tables turned in the third quarter, with most media stocks underperforming the market (down 21.3% versus the market down 8.6%). This selloff is intriguing because the fundamentals of the advertising driven media companies appear to be improving (excluding the tough political advertising comp in both television and radio in the third and fourth quarters.) In our view, investors appear to be concerned about a possible domestic economic slowdown and the prospect for a future cooling of the hyper M&A environment. At this point, we believe the sell-off is overdone, creating the opportunity to build or establish positions in our favored media names. Don't look at the second quarter in the rearview mirror, but toward the improving fundamental outlook, spurred by the political advertising cycle, and in television from the benefit of spectrum auctions in 2016.

MEDIA OUTLOOK

TELEVISION
The air came out of the balloon on television stock valuations, likely started by the concern over ESPN's weak subscriber count and the prospect of cord cutting. Subsequently, a number of Wall Street firms downgraded the broadly defined television sector, without highlighting the difference between cable networks and the broadcast networks. The subsequent sell-off in the television broadcast industry was much like "throwing the baby out with the bath water." We find this issue somewhat laughable as it relates to the local broadcast television industry, which appears to have a large runway before retransmission fee rates or revenue run into a road block. We believe that investors will gain some footing to get back into television stocks given a favorable advertising environment through 2016 and the windfall prospects from spectrum auctions next year. Near current levels, the stocks appear to reflect the next recession, in our view, which does not appear to be on the intermediate term horizon. We look for a strong stock performance for the balance of the year.

RADIO
Radio stocks were battered by investor concerns of a slowing U.S. economy, fueled by the economic woes in China. The principal focus of investor wrath was on the more leveraged companies in the group, namely Cumulus Media. The CMLS shares dropped from $2.02 on July 1, 2015 to a low of $0.68 on September 29, 2015. Cumulus Media has a lot riding on the economy, with debt leverage currently at 8.9 times our estimated 2016 cash flow. Not surprisingly, the company recently made a number of management changes to address the choking debt levels. We believe that there is not a near term liquidity issue at the company and that the shares represent an option value that the company will be able to sell assets and use its free cash flow to pare down debt. Notably, the company does not need to refinance its debt for another two years. For investors that cannot stomach that level of risk, there are safer alternatives in the group that are recommended.

PUBLISHING
Much like the leveraged radio plays, the leveraged Publishing stocks took a drastic tumble, down 28% in the quarter, versus an 8.6% decline for the general market. We believe that investors drew a conclusion that the industry would not fare well in a possible economic slowdown, reminiscent of the past economic cycle. We believe that betting that an economic downturn is around the corner is a little premature. Furthermore, we believe that the industry is moving toward other revenue streams beyond print advertising that could offer some buffer in a downturn. While our current favorite in the industry, McClatchy is highly leveraged, it does have a hidden asset that it could sell should the fundamental prospects not improve. The company still owns a 15% stake in valuable CareerBuilder. As such, investors are encouraged to take note of recent weakness in the shares.

DIGITAL
The pace of the sell-off in Digital Media stocks accelerated in the third quarter, with the stocks down nearly 26.4% year-to-date versus a decline of 8.7% year-to-date in the second quarter 2015. We believe that the sell-off was related to fears of a slowdown in the global economy, fueled by the weakness in China. Although, on average, revenue contributions from Europe account for roughly 34% and Asia Pacific a modest 4% for our closely followed companies, there does not appear to be a slowdown to be of great concern. We view the very near term outlook as a hiccup in what is expected to be a long period of investment in new Digital Media technology, with the likelihood of above average M&A activity. As an example, Ericsson, on September 9, 2015, acquired Envivio (ENVI: Not Rated) for $125 million in cash, or roughly 3 times revenue. The purchase price supports the valuations of our current recommendations.

MEDIA BRIEFS

TELEVISION
9/28/15 Comcast acquires majority stake in Universal Studios Japan for $1.5 billion
Comcast NBC Universal has agreed to purchase 51 per cent ownership of Universal Studios Japan in a recapitalization transaction, partnering with the current owners including Goldman Sachs, USJ’s CEO Glenn Gumpel, Asian private-equity firm MBK
Partners, and U.S. hedge fund Owl Creek Asset Management.

9/28/15 Nexstar Broadcasting makes bid for Media General
Nexstar Broadcasting Group Inc. offered to buy local-television station owner Media General Inc. in a bold attempt to break up Media General’s recent agreement to buy Meredith Corp.

7/22/15 Scripps Acquires Podcast Industry Leader Midroll
E.W. Scripps Company has acquired podcast industry leader Midroll Media, a five-year-old Los Angeles-based company that creates original podcasts and operates a network that generates revenue for more than 200 shows, including “StartUp” and “Nerdist.”

RADIO
9/29/15 Cumulus Media names new CEO as Dickey moves to vice chair
Atlanta radio giant Cumulus Media Inc. named Mary G. Berner CEO to succeed company founder and CEO Lew Dickey.

9/11/15 Entravision inks three-year radio deal with the NFL
Entravision Communications Corp. has signed a three-year agreement with the National Football League to bring Spanishlanguage radio broadcasts of NFL games to 13 U.S. markets.

8/24/15 Cavendish KInetics raises $36M for radio chips that boost smartphone reception
Cavendish makes radio frequency micro-electro-mechanical systems (RF MEMS) — chips with devices on them. Some are used as tuners — which Cavendish is already shipping — and some as switches that it plans to ship next year.

PUBLISHING
10/07/15 Gannett to Acquire Journal Media Group for $12.00 per share
Lee Gannett Co., Inc. (“Gannett”) and Journal Media Group, Inc. (“JMG”) entered into a definitive merger agreement under which Gannett will acquire all of the outstanding common stock of Journal Media Group for approximately $280 million, net of acquired cash.

8/25/15 McClatchy Reduces Debt by $25 Million
The McClatchy Company announced that it had repurchased $10.021 million in aggregate principal amount of its 5.75% Notes due 2017 and $15.0 million of its 9.0% Secured Notes due 2022 for a total $22.9 million plus accrued and unpaid interest in a privately negotiated transaction.

8/18/15 Tribune Publishing Company announces $30 million Stock Repurchase Program
Tribune Publishing Company today announced that its Board of Directors has authorized a stock repurchase program, under which the Company may repurchase up to $30 million of outstanding Common Stock over the next 24 months.

DIGITAL
9/30/15 Comcast launches Youtube rival platform Watchable
Comcast launched the beta version of its new Youtube rival video platform Tuesday. After $200 million in investments in Buzzfeed and Vox Media, Comcast has been planning to launch Watchable for weeks.

9/29/15 Business Insider sold for $343 million in largest digital news deal ever
German publisher Axel Springer announced that it bought 88 percent of Business Insider for $343 million. The deal puts the value of New York City-based Business Insider, an online news powerhouse that has a reported 76 million readers and 325 employees around the world, at $442 million. The news site was cofounded by former Merrill Lynch Internet analyst Henry Blodget.

9/25/15 NBCU’s Fandango Acquires Brazilian Ticketing Site Ingresso for $66.49 million
Fandango has made its first international acquisition: NBCUniversal’s movie info and ticketing division is buying Brazilian entertainment-ticketing service Ingresso.

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