Content Stocks Share The Market’s Pain

Economic Malaise Afflicts Programmers, Too, Especially If They Own Newspapers

By Mike Farrell -- Multichannel News, 7/13/2008 7:55:00 AM

Cable programmer stocks have been feeling the pain during the first six months of the year, declining a collective 21% between Jan. 2 and July 7, despite strong ratings growth and one of the more robust upfronts for cable in recent memory.

While practically no programmer stock went unscathed during the first six months of the year — of the 11 stocks in the sector, only two reported small gains in the period — the overall decline was fueled mainly by the three top stocks in the sector: News Corp., Viacom and CBS.

From Jan. 2 to July 7, News Corp. stock declined to $14.63 from $20.70, down 29.3% or $6.07; Viacom fell to $28.96 from $42.54 each (a 31.9% or $13.58 decline) and CBS dropped to $17.73 from $26.42, down 32.9% or $8.69)

The biggest-loser distinction went to Playboy Enterprises, which shed almost half of its market value between January and July. Playboy’s share price dipped to $4.78 from $8.89 in the period, a 46% drop.

Two stocks — Outdoor Channel Holdings and World Wrestling Entertainment — rose in value. Outdoor Channel stock went from $6.25 on Jan. 2 to $6.54 on July 7 (a 4.6% increase) and shares in WWE increased to $15.33 from $14.66 each, up 4.6%. Both seem to have been hit partly by the overall market decline during the month of June. In June, the Dow Jones Industrial Average plunged 10%, its worse June showing since 1930. Outdoor Channel and WWE stock traded as high as $8 (up 28%) and $16.34 (up 11.5%), respectively that month.

“It’s the overall dumping of anything consumer discretionary and media-related,” Miller Tabak media analyst David Joyce said of the decline in the sector. “We’re seeing historic lows in valuation for anything in the cable, media and broadcasting space.”

Joyce isn’t that optimistic that the stocks can turn themselves around in the second half, adding that may depend on the health of the overall economy.

“My hope is yes [the stocks will turn around],” Joyce said. “My studies in the past have shown that media conglomerate stocks tend to lead an emergence from a recession.”

Joyce said cable networks are still better-positioned than broadcasters because of their dual revenue streams (advertising and affiliate fees). That’s largely being overlooked by investors focusing more closely at other aspects of these diverse media conglomerates.

Nowhere is that more evident than with News Corp.

News Corp. stock is down 29% so far this year and hit five new 52-week lows between June 27 and July 7. This after having a strong fiscal third quarter (revenue and operating income were up 16% each) and expectations that affiliate fees at Fox News Channel will increase dramatically in the fiscal fourth quarter as old deals with Time Warner Cable and other large distributors expire.

Joyce believes News Corp.’s cable networks will report mid-teens percentage growth in their fiscal fourth-quarter revenue, with new Fox News affiliate deals and strong results at its other cable nets like FX Network.

“Nobody’s paying attention to cable networks,” Joyce said. “They’re paying attention to newspapers. In a nervous market, investors focus on the negative and disregard the positive.”

The newspaper industry, in a years-long decline, is expected to lose even more ground in the upcoming quarters. Already, forecasts have overall newspaper revenue dipping 6% to 8% in the second quarter. At News Corp., which owns major newspapers like The Wall Street Journal and New York Post, newspaper revenue is expected to fall off by about 8% in the period.

At Viacom, the story was a little different, Joyce said. Viacom shares are down 31.9% since the beginning of the year, primarily because of fears its Paramount unit would lose a deal with director Steven Spielberg, thus further commoditizing the studio and sluggish advertising revenue growth.

Plus, Viacom CEO Philippe Dauman said at an industry conference in May he expected ad revenue to rise 2% to 4% in the second quarter. That was roughly half of what most analysts expected.

Criticism of the schism that split Viacom into two separate companies — CBS and Viacom — in 2005 also appears to have resurfaced, with at least one analyst calling for the media giant to take advantage of its low stock price and go private.

Pali Research analyst Richard Greenfield said in a recent report he thought Viacom could go private for about $21 billion, adding that the value that was supposed to be unlocked for both stocks as a result of the split never materialized.