Analysts cautiously optimistic on biz for 2012
It’s been a wild ride for markets and showbiz stocks this year as the U.S. economy threatened to tip into another recession and Europe spread gloom.
Heading into 2012 there’s a glint of hope the worst may be over. But media optimism is tempered by poor “visibility” on the ad front, meaning it’s hard to see beyond a day, a week or a month.
“The ad market is guilty until proven innocent,” declared David Bank, a media analyst with RBC Capital Markets.
Showbiz shares lean heavily on advertising and subscriptions, which can be complicated to predict when corporations are jittery and consumers strapped for cash. Wall Streeters are surprised TV advertising has held up as well as it has, and they don’t trust it. So, as they pick favorite stocks, they focus on other areas like Disney’s theme parks; retransmission consent and reverse compensation at CBS; and rising affiliate fees at News Corp.’s cable networks.
Sirius XM Radio, Scripps Networks Interactive, Imax and even Zynga — the online gamemaker that just got slammed in its recent IPO — could also be winners in a holiday stocking. Lionsgate will be red hot if “Hunger Games” delivers at the B.O.
Analyst Bank’s preferred play in big media is News Corp. He cites higher affiliate fees and political advertising on the way for Fox News (and the Fox station group) and the conglom’s shedding millions in operating losses by cutting loose MySpace.
“There are some good stories to tell at News Corp., which has had its ups and downs this past year,” agreed Anthony DiClemente of Barclays Capital. The company’s U.K. newspaper arm was shaken by a phone hacking scandal that exploded last summer, ricocheted through News Corp.’s exec ranks and called into question the future of heir apparent James Murdoch.
But DiClemente said the firm’s top pick in the space for 2012 is Disney on improved theme parks and ESPN’s continued muscle. The cable net is finding added value from digital sports content on tablets and other devices.
Disney’s been investing heavily in its parks with a $1 billion renovation at Disney California Adventure and last September’s launch of the new Aulani resort in Oahu, Hawaii. Spending will taper down, meaning more free cash flow and the investments starting to pay off in 2012.
For Jim Goss of Barrington Research, CBS is a favorite for steady programming, new coin from retrans and reverse comp and particularly impressive contributions from international syndication. The cornerstone of the company, the CBS broadcast net, is having a strong season, particularly with its comedies. “CBS owns an increasing share of their content. Once upon a time they used to run deficits. Now (with international) they are in profit from day one,” he said.
Retrans and reverse comp, where the company collects from respectively, MSOs and stations, create “a very large opportunity with little cost attached.”
Analysts still note while CBS has diversified its revenue base significantly, it’s still the most exposed of the majors to advertising.
Goss also touts Sirius, which has been paring down debt, expanding its subscriber base and is planning the first price increase in its history in January.
“I still hear it referred to as a penny stock because it (trades) at couple of dollars a share or less,” Goss said, “but Sirius is becoming recognized as a fundamental story.”
The company is moving towards a billion dollars in earnings before interest, taxes depreciation and amortization — a key indicator for Wall Street. Content costs have tempered. The service is installed in 65% of all new cars and about half yield paying subs.
Bank like Scripps Networks Interactive, parent of HGTV, Food Network, Travel Channel and Cooking Channel. He sees 2012 growth and a strong deal in the acquisition of UKTV from Virgin. He hopes Scripps can finally buy out Tribune’s minority stake in Food Network. And he noted that Scripps has yet to ink a big over-the-top programming deal with Netflix or its rivals like ones that have injected millions of dollars into other content companies.
Wall Street is starting to eye Imax as it adds screens, transforms its business and seems to have a winner in a high-profile hookup with Paramount’s “Mission” Impossible — Ghost Protocol.” The latest pic in the lucrative franchise played for an exclusive five-day window in large-format theaters, most of them Imax screens, starting Dec. 16 before its wide release. Imax is looking to ink similar deals with studios that want to generate extra buzz for their big-tickets films.
Ben Mogil of Stifel Nicolaus said “Mission’s” $12.8 million take from the early large-format release beat investor expectations of about $10 million. He sees upside for the company in a number of re-releases in 2012, most notably “Titanic” on April 6.
Mogil also cites Lionsgate as a stock to watch as it prepares for the March bow of “Hunger Games,” which the mini-major hopes will be a franchise. “If that movie performs well, the stock will perform well,” Mogil said.
Michael Pachter of Wedbush Securities is a big fan of Zynga, which he thinks has a great business despite a high-profile initial public offering that fizzled last week. Zynga’s 60 million daily active users play its popular games on Facebook.
But Pachter doesn’t think investors understand the story — partly the fault of underwriters whose job it was to explain what the company does. They look “at Internet metrics, but it’s a game company. They should be talking about gaming,” he said. Zynga needed a few quarters to prove itself before the IPO, “And they will prove it,” he said.