Due to a spat between CBS (CBS) and Time Warner Cable (TWC), subscribers to the latter will miss golf events, baseball and pre-season football games and more carried by CBS. Analysts say the TWC blackout, prompted by a dispute about licensing fees, could cost CBS $400k / day. Relative to the intrinsic merits of the ME (media-entertainment) sub-sector, I believe this is a small matter. UBS analyst John Janides agrees (previous link) reiterating his firm's "Buy" rating on CBS. TWC's blackout, he says, will cost CBS only a penny every two weeks in share price. Things will work themselves out by then.
This article will outline the premises for the superior position and growth prospects in the ME space and offer views on the best buys in this lucrative and powerful area of what prominent sociologists termed "the culture industry."
While Disney (DIS), Fox (FOX) or Time Warner (TWX) vie for Sony's (SNE) studio-entertainment entity, here we are considering larger issues that bear on sector relative strength, investment strategy and socio-economic dominance. This analysis views films, cable and satellite, broadcasting, publishing and entertainment as a functional unit, the primary media of education in our times. Comcast (CMCSA), CBS , Discovery (DISCA), Netflix (NFLX) and Viacom (VIA) are other major players in this industry of cultural definition and change.
Media narratives and Hollywood trailers alike display an increasing integration of screen world with governance, cultural styles and markets. Remember: a key part of price action reflects the selling of narratives, subsequent sentiment and informed opinion. This is part of the premise for the importance of the ME that distinguishes it from the rest of Consumer Discretionary with which it usually is grouped. While McDonald's (MCD), Home Depot (HD) or Starbucks (SBUX) give people what they desire (albeit their ads help shape what we desire), the ME complex by its nature offers dazzling images entwined in compelling narratives that make us want what the produce and seduce us to believe and form our sense of reality on the information they purvey. This structuring of consciousness and belief is a need as basic as food: in that regard ME is like Consumer Staples or commodities but without the volatility: it is always in supply and captures the eyes and steals the mind. In this regard it is supremely powerful. Governments have known this for decades and the mutuality between them and the ME works to the advantage of both, strengthening investment outlook.
As far as investment in ME majors, one must consider whether its role in directing cultural change increases its ability to outperform when weakening economic basics hurt other parts of consumer discretionary like HD. I believe it does and that major companies like those noted above, and those to be reviewed below are as intrinsic to culture as Wheat (WEAT) and Corn (CORN) and increasingly will dominate socio-economics even as the most basic commodities grow scarce.
Here is a brief look at the major players in the sector, guidance for buying, and when to buy follows.
CBS is +85% since November 2012 with 3% revenue growth on $14 billion in revenues and generating $2.65 EPS on net income of $1.654 billion. Market watch lists its quick ratio is 1.45. The best quick ratios in the ME space are DISCA at 1.7, FOX at 1.5 and News Corp and TWX at 1.2. In a class of their own in revenue growth are film purveyors NFLX at 19% and DISCA at 16.8%. The next best grouping in growing revenues are DirecTV (DTV), DIS and FOX 7.6%, 7.3% and 7% respectively. DIS and FOX show $5.97 and $5.92 billion net incomes. DTV has net income of $2.9 billion on $30 billion revenues with an impressive $4.71 EPS. Comparing film and network giants, FOX is a bit more profitable with revenues 3:4 those of DIS which yields 1.2% on a 23% payout ratio while FOX keeps nearly all its income, yielding just .6% on a tiny payout of 7% on net income at 16% of revenues which should power growth going forward. The share buyback of VIA will boost its price but the revenue growth of DIS and FOX in addition to their extensive production and cultural reach show them best of class.
Note that June 28 formalized the separation of 21 Century Fox from NWSA which retains the extensive print media, book publishing, digital marketing and real estate sections that had been under one umbrella with FOX at News Corp. Rupert Murdoch remains as principal of both companies. FOX is +34% YTD and has $73 billion market cap. My thesis of volatility and transformation of global economies ahead posits giant and mega-caps with vast market share as the sturdiest survivors.
Share prices for VIA leaped when it reported 20% net income growth and increasing revenues in fiscal 3Q. As of that August 2 report, VIA had $1.31 EPS. Moody's however does not like the share buyback which will increase debt and thus it cut the rating of VIA's senior notes to Baa2. Its quick ratio, 1.1 seems fine.
Major banks have severe derivative exposure and Asian banks, holding $7 trillion in USD reserves have great power over American debt and credit markets and thus the economy. This is part of a dicey macro-economic picture: when big banks tremble, consumers pay and social relations are re-ordered. By increasing gold assets, Asian banks gain leverage while USD relative strength stifles PMs, the geopolitical heft of China and the holdings of those with alternative sources of value, mainly commodities.
Another point on the macro-economic picture that may sink the markets is jobs. I repeat what I wrote in my previous article (and have noted often this year) that one must watch the U-6 and workforce participation rates to get a realistic view of how many have work that can sustain life. Dan Alpert of Westwood Capital on August 2 affirmed my view that "we have become a nation of hamburger flippers, of Wal-Mart (WMT) sales people … of low-wage jobs." He added that this helps explain the anemic GDP and consumer spending levels. This year a meager 27k industrial jobs have been created while part time positions have grown 247k.
Neither of these two otherwise alarming macro situations will damage the profitability and socio-economic dominance of ME major players.
Like the S&P, nearly every sector is at the top of its 52-week range. Look to PMs (precious metals) for buying opportunities at present. The best companies in my view are Goldcorp (GG), First Majestic Silver (AG), Silver Wheaton (SLW) and Eldorado Gold (EGO) whose 2Q report may be read here. Wait for a red week or consecutive red days before adding to other equities. Health Care (VHT) will have great relative strength long term.
Remember that the media-entertainment complex, especially its media portion is not really discretionary but essential to governance and cultural and individual identity. FOX, CBS and TWX are the best plays for their combination of growth, revenues and profitability. CMCSA with its immense revenues ($63 billion), cash flow ($25.2 billion) and 2.9% revenue growth is rated the strongest buy by major analysts. CBS, TWX and DIS in that order have similar 12-month ratings (all Strong Buys) from major firms. The rocketing revenue growth of DISCA and NFLX merits attention.
For those who prefer to spread investment in the space, Vanguard's Discretionary ETF (VCR) has DIS, CMCSA, TWX and NWSA in its top 8 holdings. The top twenty also hold DTV, VIA and CBS. However, these companies all are near their target prices while PMs have enormous upside. Try to balance those strengths and opportunities in considering investment and allocation. Do not forget the turbulence of the times and the inflated nature of most asset prices outside of the PM space. Despite profound differences, the they and the media-entertainment complex should outperform going forward.