The audio visual (AV) production space is booming with the industry expected to grow at a pace significantly above the general economic growth, spurred by new innovations and exciting trends. The “rewarding” industry has been experiencing robust growth since the end of October 2017, benefiting from an improving economy, declining unemployment rate and increased consumer spending.
The industry perimeter is likely to expand to include a mix of cloud and on-premise solutions wherein cloud services will progressively become common for IoT-based visualization solutions, minimizing operational costs and enhancing efficiency.
Monumental shift from analog to digital technology over the last several years has met the demand for higher resolution video, reduced the problems of radio frequency and electromagnetic interference, making AV systems more data-network-friendly. Wireless transmission has enabled broadcast of audio video signals via wireless data networks, enhancing overall productivity of the industry.
Looking at the United States, innovative connected televisions, microphones and speaker enclosures happen to be the most popular devices among consumers. The continually growing demand is being stimulated by increasing disposable income, introduction of technologically advanced devices and decreasing prices of consumer electronic devices, paving the way for growth of the consumer electronics market.
Industry Trumps on Shareholder Returns
Looking at shareholder returns over the past year, it appears that the advent of advanced technologies in order to meet the growing consumer demands have restored investors’ confidence in the industry’s prospects. Ultra-high definition televisions have delivered extra-large video displays with finer resolution and crystal-clear sound clarity. With the emergence of interactivity, the desire to have video walls that interact with users has also increased.
The Zacks Audio Video Production Industry within the broader Zacks Consumer Discretionary Sector, has outperformed both the S&P 500 and its own sector over the past year.
While the stocks in this industry have collectively gained 27.2%, the Zacks S&P 500 Composite and Zacks Consumer Discretionary Sector have rallied 12.3% and 12.6%, respectively.
One-Year Price Performance
It is worth noting that audio and video equipment competes with PCs, tablets, smartphones and game consoles in the consumer home entertainment market. In addition, the U.S. manufacturers of audio and video equipment face significant competition from imports, particularly from China and Mexico.
Audio Video Production Stocks Trading Cheap
In addition to solid price performance over the past year, the industry's valuation picture looks quite attractive. One might get a good sense of the industry’s relative valuation by looking at its enterprise value-to EBITDA ratio (EV/EBITDA), which is the most appropriate multiple for valuing audio video production stocks.
Audio video production is a capital-intensive industry, incurring significantly high capital investments for technologically obsolescent products and high R&D expenses. The firms have high depreciation expenses due to a large fixed asset base. The EV/EBITDA ratio essentially measures the value of a company, inclusive of debt and other liabilities, to the actual cash earnings exclusive of the non-cash expenses.
The industry currently has a trailing 12-month EV/EBITDA ratio of 4.9X, which is below the 12-month median of 5.1X. Over the past year, the industry has traded as high as 7.1X and as low as 4.2X.
The S&P 500 Index is currently trading at 11.3X trailing 12-month EBITDA with a high, low and median over the past year of 12.7X, 10.7X, and 11.3X, respectively.
Enterprise Value/EBITDA Ratio (TTM)
Comparing the group’s EV/EBITDA ratio with that of its broader sector also shows that the group is trading at a discount. The Consumer Discretionary Sector’s trailing 12-month EV/EBITDA ratio of 16.3X is above the Zacks Audio Video Production Industry’s ratio.
Enterprise Value/EBITDA Ratio (TTM)
Outperformance May Continue on Solid Earnings Outlook
The U.S. audio and video equipment industry includes diverse manufacturers who produce televisions, stereos, speakers, video players and camcorders along with gaming consoles, drones and high-end cameras. Expectations of healthier profit margins with intensive infrastructure investments to meet the strong demand pull will likely lead audio video production stocks to generate solid shareholder returns in the near future.
But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. While the above ratio analysis shows that there is a healthy value-oriented path ahead, one should not really consider the current price levels as good entry points unless there are convincing reasons to predict a rebound in the near term.
One reliable measure that can help investors understand the industry’s prospects for a solid price performance is the earnings outlook for its member companies. Empirical research shows that a company’s earnings outlook significantly influences the performance of its stock.
One could get a good sense of a company’s earnings outlook by comparing the consensus earnings expectation for the current financial year with last year’s reported number, but an effective measure could be the magnitude and direction of the recent change in earnings estimates.
The light blue line in the chart below shows the evolution of aggregate 2018 earnings estimates for operators in this space (the red line represents 2019 expectations). The consensus estimate for the Zacks Audio Video Production Industry of $3.22 per share implies a year-over-year growth of 43.8% as the trend in earnings estimate revisions continues to remain favorable.
Price and Consensus: Zacks Audio Video Production Industry
Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings potential.
The consensus EPS estimate for the current fiscal year has been revised 20.1% upward since the beginning of the year.
Zacks Industry Rank Indicates Optimistic Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term.
The Zacks Audio Video Production industry currently carries a Zacks Industry Rank #28, which places it at the top 23% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Our proprietary Heat Map shows that the industry’s rank has more or less remained favorable over the past six weeks.
Industry Portrays Improving Revenues and Earnings Trend
The favorable/bullish outlook finds solid traction in the sturdy top- and bottom-line performance over the past few years. The audio video production firms have shown modest recovery in the top line since April 2016. The industry generated $65 billion in revenues in 2016 in the Americas and is expected to surge to $83 billion in 2022.
Another important indication of improving long-term prospects is the uptrend in the group’s GAAP earnings, which have improved sharply from 2017 onwards.
The industry is likely to benefit from healthy growth dynamics backed by improving macroeconomic environment, technological innovations and rise in consumers’ disposable income leading to higher discretionary expenses. Investors might be better off if they stick to a few audio video production stocks that have a solid earnings outlook along with cheap valuation metrics.
However, profitability of individual companies largely depends on manufacturing efficiency and effective marketing and distribution. Companies, which have a sound fund flow, often get advantages in economies of scale in manufacturing, marketing and distribution while typically smaller firms compete effectively by offering specialty products or components in system solutions.
While none of the stocks in our audio video production universe currently has a Zacks Rank #1 (Strong Buy), below is a stock that has been witnessing positive earnings estimate revisions and carries a Zacks Rank #2 (Buy).
(You can see the complete list of today’s Zacks #1 Rank stocks here.)
Panasonic Corporation (PCRFY - Free Report) : This Kadoma, Japan-based audio video production firm has gained 48.7% over the past two years. The Zacks Consensus Estimate for the current-year EPS has been revised 2.1% upward over the last 90 days.
Price and Consensus: PCRFY
Investors may also hold on to the following three stocks having a Zacks Rank #3 (Hold).
GoPro, Inc. (GPRO - Free Report) : The consensus EPS estimate for this San Mateo, CA-based audio video production firm has improved 12.5% for the current fiscal year, over the last 90 days.
Price and Consensus: GPRO
Dolby Laboratories, Inc. (DLB - Free Report) : The stock of this San Francisco, CA-based audio video production firm has returned 28.7% over the past two years.
Price and Consensus: DLB
Sony Corporation (SNE - Free Report) : Shares of this Tokyo, Japan-based audio video production firm stock have rallied 63.1% in the past two years. The Zacks Consensus Estimate for the current-year EPS has been revised 2.4% upward over the last 90 days.
Price and Consensus: SNE
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