Long-term limp hobbles media stox

Cost control, overspending play roles as shares mature

NEW YORK — What’s up with media stocks? Not much over the last decade. With the exception of last year, when the entertainment congloms and key cable companies outpaced the overall stock market by about 3.5%, media shares as a group have woefully under-performed the market over the past three, five and even 10 years.

In fact, you’d have to go back a full 25 years to find a market-beating return on investment.

Blame it on failed cost control and overspending on acquisitions that bore little fruit, but for an industry that touts itself as highly dynamic, media has largely become a laggard.

Over the last five years, the media congloms fell harder than the market (down 8.2% vs. the market’s 1.1% decline). Even over the last 10 years, media was up 7.5% while the overall market gained 11.7%.

“That’s a phenomenal underperformance,” says Vadim Zlotnikov, chief investment strategist at Sanford Bernstein.

Construction, medical devices, financial services and even the tobacco industry put the glitzy media biz to shame. Even the heavily cyclical ad agencies managed to keep pace with the market over the same time frame.

At around $41 per share last week, Viacom shares are trading at the same price they were back in January 1999. Disney, which trumpeted a market-trouncing 43% share gain in 2003, is still trading today where it was in January of 1997, nevermind anywhere near its April 1998 peak of $43.

A shrewd long-term investor would have done far better putting bets on financial services companies (up 42% last year and 22% over 10 years, or Internet retailers (up 57% last year and flat over 10 years).

Even dowdy tobacco companies — thanks to some juicy dividends — beat media, gaining 41% last year and more than 16% over the past five and 10 years.

Zlotnikov says media groups didn’t manage costs particularly well, but the overwhelming problem, Zlotnikov and most stock analysts say, is the number of aggressive acquisitions done at untenably high price multiples.

It’s an axiom that 70% of all mergers and acquisitions destroy shareholder value, and deals paid in stock — like AOL and Time Warner — tend to crush share value worse than deals using cash as dealmaking currency.

Clearly investors are spooked, which is one reason even star performer Comcast is in a holding pattern as long as there’s a chance it might buy Disney.

To be fair, there have been some standouts in the broader media sector, including radio and TV stations that soared in the mid- to late-1990s in the rush of takeover mania. Cable stocks also enjoyed a big surge in 1997 after Microsoft invested big bucks in Comcast.

But investors quickly grew fearful about all the debt required to upgrade networks, and the rise of the Internet raised concerns about technological risks to their core business.

More recently, high-flying shares like Netflix (share price jumped 400% since its IPO in 2002) and Marvel (up 300%) rocketed as investors sought new perches from which to play the changing media environment. Netflix, with a new distribution model, and Marvel, with its untapped catalog resources, perfectly fit the profile of the go-go growth company.

But those kinds of media darlings also can flame out quickly at the slightest hint of a slowdown.

Fund manager and noted bear Hal Vogel has no trouble pointing to what ails the biz.

“The film business has had notoriously poor returns, TV syndication in the last 10 years has been flat, and cable requires huge capital investment,” he says. “Sure, cable program nets are a bright spot, but even those businesses are getting mature.”

So are media stocks simply — gasp! — mature?

Vogel and several other buy-side skeptics seem to think so.

Part of the problem, says Vogel, is that congloms have gotten so big that they can’t do anything but reflect the market they’re in, like advertising.

“Companies talk of unlimited potential, (for entertainment viewing growth) but there are only so many hours in a day for consumers to consume.”

To rev up the growth engine, the congloms may need to start looking outside their core competencies into new areas, like videogames or Internet retail, or any other place that attracts eyeballs, and therefore advertisers.

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