Since the setback of 2008, one seems to forget about recurring, periodic upturns for demand in many industries. One of the most reliable - in the past - has been the surge in demand for advertising spending around the presidential election cycle and the summer Olympics. (It used to be more pronounced when the Winter Games were held in the same year). However, television advertising sagged in the aftermath of the great freeze.
With a return to strong corporate earnings comparisons, a rise in leading economic indicators (albeit modestly), improving consumer confidence (albeit modestly) and the prospect of the quadrennial Olympics election cycle, the prospects for increased spending on traditional television media appear pretty high.
The pattern is a well established one. The most recent data for the cycle as recorded by the Television Bureau of Advertising shows the pattern quite clearly for traditional television networks and stations:
|Political and election spending 2005-2009, in millions|
|Year||Total||Spot/Local||% total||Network||% total|
In traditional media like the four broadcast networks and cable advertising networks, stronger spending by advertisers should power earnings and free cash flow comparisons over the next four or five quarters. We know already that advanced purchases of television time on both traditional networks and cable networks has been up strongly. Broadcast and cable news reports a $10.2 billion upfront sales for cable networks alone. Upfront sales usually constitute between 70% and 90% of yearly revenue.
With the broadcast season start in October, comparisons will accelerate in the second half of this year and well into the next year and even into the following year if the economic recovery strengthens.
Social and search media played big roles in the election of 2008 and will probably play even a greater part in 2012. We will write about how to play these trends in the future, but clearly Google (GOOG) is a major beneficiary.
Still, we like the industry. We like exposure to traditional over the air networks with good ratings movement, but prefer exposure to cable TV networks.
We prefer these plays at the moment over cable because cable growth remains vulnerable to continued turmoil in the housing market. No doubt cable TV revenues will also be aided by increased spending but face head winds from subscriber stagnation or even losses.
We think the following names will do well.
Viacom (VIA) (57.49)
Led by Sumner Redstone, Viacom remains (deliberately) the purest large content play and the best exposed to cable network gains. With little debt, high ROI, and accelerating earnings ahead of it, VIA offers strong exposure. Among large-cap names, Viacom has the best exposure to content and advertising. VIA dominates the highly rated kids, comedy and music basic cable franchises and also produces motion pictures and television series through its Paramount pictures Corp. subsidiary. Viacom outperformed the S&P, with consensus estimates of $3.61 and $4.15. We see the stock trading at $70.45 currently and $81.15 using median pe over the last five years.
CBS (CBS) ($29.54 )
CBS was spun out of Viacom in 2005. The idea behind the move was to leave the faster growing assets in Viacom and to place the slower growing legacy businesses in a company that would generate cash and dividends. CBS operates in markets highly exposed to the advertising cycle: the top rated network (54% of total revenue) through CBS Television Network; CBS Television Studios; CBS Studios International; CBS Television Distribution; CBS Films; and CBS Interactive. Local broadcasting (20%) and outdoor (13%) could be the biggest beneficiary because 75% of political spending is local. CBS has 29 television stations, owned broadcast television stations; and CBS Radio owns and operates 130 radio stations in 28 markets. Outdoor consists of advertising on billboards, transit shelters, buses, rail systems (in-car, station platforms and terminals), mall kiosks, retail stores and stadium signage principally through CBS Outdoor. Other businesses include pay cable networks (10%), primarily Showtime. Publishing (6%): Simon & Schuster, but is not directly exposed to the ad cycle. CBS has outperformed the S&P by 8% over the last year, pays a 40cent dividend but has significant debt at $7.5 per share. Still if the company earns consensus $1.73 per share this year and $2.10 next year then the shares could trade at $33.50 per share currently and $41 per share next year.
The Walt Disney Company (DIS) ($40.65)
Disney owns ABC television networks and stations, ESPN networks and radio, and A&E Networks. ABC television network continues to deliver the most attractive demographic, young women 18 to 49. ESPN is extraordinarily profitable and is one of the few avenues for advertisers to reach young men. Disney has equity interests in other basic cable networks but does not control the cash. Disney media networks make up half of its revenue and two thirds of its operating income of the company’s income and most of its cash flow. The rest of the company’s businesses - parks and resorts, consumer products, studio productions - are consumers of capital. The company trades currently at 18.6 times TTM earnings of $2.27 per share. It offers a 40 cent dividend - 1% yield. Based on consensus estimates of $2.56 for the current year and $2.98 for the year ended Sept 2012, Disney could reach $55 per share assuming the shares are priced at the median high price earnings multiple for the last five years.
Scripps Network Interactive (SNI) ($48.29)
SNI offers investors a mid sized pure play in the sector. The company’s Food and HGTV networks and related websites reach a highly attractive female demo. In the current upfront market SNI sold out a high proportion of its inventory at double digit price increases. With a market capitalization of $8.2 billion, recently, the company abandoned plans to put itself up for sale and instead began a $1 billion repurchase program, presumably we believe in lieu of a dividend increase currently at $.28 per share with a year of 0.58%. With last year earnings of $2.54 per share, $2.76 per share for this year and $3.18 for next year, the shares should trade at $55.88 per share currently and $64.38 next year.
Discovery Networks (DISCA) ($41)
Discovery is a pure play and operates basic cable and satellite-delivered channels in the U.S. and Internationally. Two thirds of the company’s income comes from U.S. basic networks, which include three fully distributed networks that each reac more than 97 million subscribers and six networks that each reach 34 million to 70 million subscribers, including Discovery Channel, TLC and Animal Planet. Effective December 31, 2010, it also owned and operated the Discovery Health network. On January 1, 2011, it contributed the Discovery Health network to the Oprah Winfrey Network (OWN), which is a 50-50 venture between the Company and Harpo, Inc. The U.S. Networks segment also owns an interest in The Hub, which is a 50-50 venture between the company and Hasbro, Inc. (Hasbro). As of December 31, 2010, Discovery’s International Networks operated over 130 distribution feeds in over 40 languages. International Networks owns and operates a portfolio of television networks, led by Discovery Channel and Animal Planet, which are distributed in virtually every pay television market in the world through an infrastructure that includes operational centers in London, Singapore and Miami. During 2010, it started the international rollout of TLC as a female-targeted global flagship, which was launched in over 30 countries and territories in Europe and Asia. The shares have underperformed the S&P for the last year by 8%. If the company produces consensus estimates of $2.33 and $2.79 for the following year, the shares could rise to $60 based on a median pe for the prior three years.
There are clearly a number of other beneficiaries from this cycle. I am leaving out News Corporation (NWSA) which owns the Fox Cable Networks and Fox Television because the company has so many other businesses and is a mess with the current scandal. I'm also leaving out the cable plays like Comcast (CMCSA) which recently acquired control of NBC Universal because it deserves its own report.