If Monday’s roller coaster ride was any indication, 2016 is shaping up to be another volatile year for the equities markets.
Media stocks are already coming off a year when investors showed their bearish side, with most of the major congloms posting declines in share prices for 2015. That stands in contrast to the previous few years which were generally solid for the sector.
Monday got the new year off to a panicky start with a broad sell-off that saw the Dow Jones index plunge by more than 450 points before recovering nearly half of that loss. Despite the gravitational pull, however, the largest bellwether media stocks hung tough with declines in the 1%-3% range.
Nevertheless, there’s no doubt that concerns about cord cutting, declining ratings and shifting viewing habits made investors jumpy, particularly in the second half of 2015. Among the largest of the U.S. entertainment congloms, only Disney shares ended the year in positive territory. And yet Disney saw sell-off activity in December even on the heels of its record-busting global rollout of “Star Wars: The Force Awakens,” after analyst Rich Greenfield of BTIG Research downgraded the stock based on concerns about the long-term prospects of Disney-owned ESPN.
The fall in stock prices could grease the wheels for more M&A activity among big media players. Industry analysts have been predicting that content providers will join in the consolidation boom that has swept through the distribution side of the TV biz. The softness in media stock values will make deals less pricey overall and give shareholders more reason to embrace change.
“Whether we see the outright sale of a film studio or the combination of cable network portfolios, we would be surprised if media management teams and their shareholders don’t start pushing more aggressively for different combinations,” analyst Michael Nathanson of Moffett-Nathanson wrote last month.
Among traditional media companies, Viacom shares took the biggest hit. In the past two years, the company has battled sector-wide issues of ratings and subscriber declines, and has carried the added burden of growing uncertainty about its long-term future, with 92-year-old chairman Sumner Redstone in declining health.
Time Warner, 21st Century Fox and Discovery Communications all suffered 20%-plus declines for the year. CBS was off nearly 15%. Among the smaller players, AMC Networks notably bucked the downtrend thanks to its success with spin-offs “Fear the Walking Dead” and “Better Call Saul.”
The biggest gainer in the media/entertainment sector was — no surprise — Netflix. Facebook and Amazon closed out in positive territory, but even Apple was off slightly. Surprisingly, one of the bright spots in traditional media stocks was the cable sector, after the largest operators delivered better-than-expected numbers in the third and fourth quarters. In an environment of cord-cutting, analysts believe Big Cable has the best shot of holding on to high-end customers because of the quality of cable’s broadband service. Comcast reflects this trend, with its share price essentially flat for the year.
The downtrend of the major indexes accelerated in August when global markets were jolted by signs of a slowdown in China. Some $2.1 trillion in equity value was wiped out in U.S. markets in a three-week span. Media shares were hammered when Disney’s Robert Iger mentioned, during an earnings call, that ESPN would see a slower rate of affiliate fee growth than forecast — a sign that cord cutting was hitting the highest levels. Media companies alone lost more than $60 billion in value in the two-day span of Aug. 5-6.
Stocks have recovered some ground since then, but the shocks of the August meltdown haven’t worn off, as evidenced by the trading turbulence in December. As Bernstein media analyst Todd Juenger put it bluntly: “The U.S. television industry is entering a period of prolonged structural decline caused by the migration of viewers to non-ad-supported platforms.”