The Zacks Broadcast Radio and Television industry is primarily benefiting from higher spending on video advertising. Moreover, rate increases are driving distribution of revenues for industry participants.
Television ad spending is also strong primarily due to higher political spending in the first-half of 2018. As a series of contests are scheduled for November, the momentum in political spending is expected to remain strong.
Consumer’s unfavorable disposition, particularly toward advertising, has hit hard the Zacks Broadcast Radio and Television industry. The industry participants are now offering a variety of alternative packages, including skinny bundles, which are delivered at lower costs than traditional offerings in order to attract consumers.
Further, increasing investments in original content and focus on providing quality entertainment are helping the industry participants to lower their churn rate.
Industry Returns Are Positive
The Zacks Broadcast Radio and Television 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 climbed 23.3%, the Zacks S&P 500 Composite and Zacks Consumer Discretionary Sector have gained 14.7% and 5.9%, respectively.
One-Year Price Performance
Stretched Valuation a Concern
Since there has been an exponential surge in debt level since 2012, it makes sense to value the industry based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because this valuation metric takes into account the level of debt.
For capital-intensive companies, the EV/EBITDA is a preferable valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
Valuation of the Broadcast Radio and Television industry looks stretched at the moment. The industry currently has a trailing 12-month EV/EBITDA ratio of 27.48X, which is close to the high of 30.15X in the past year and above the median level of 25.92X.
The space also looks expensive when compared with the market at large as the trailing 12-month EV/EBITDA ratio for the S&P 500 is 11.69X and the median level is 11.42X.
EV/EBITDA Ratio (TTM)
Moreover, a comparison of the group’s EV/EBITDA ratio with that of its broader sector ensures that the Broadcast Radio and Television industry is trading at a significant premium. The Zacks Consumer Discretionary Sector’s trailing 12-month EV/EBITDA ratio of 16.10X and the median level of 15.30X for the same period are way below the group’s respective ratios.
EV/EBITDA Ratio (TTM)
Earnings Outlook Suggests Less Room for Growth
The Zacks Broadcast Radio and Television industry is witnessing a sea change on the rapid evolution of distribution platforms as well as entrance of players and the newest technologies.
Industry participants are trying hard to keep up with changing consumer preference by altering their business models as well as providing time-delayed and on-demand content. Although these are expected to drive the top line, increasing programming cost is likely to hurt profitability.
However, what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead.
One reliable measure that can help investors understand the Zacks Broadcast Radio and Television industry’s prospects for a solid price performance going forward is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.
One could get a good sense of industry’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 Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for it and the industry's aggregate stock market performance.
Price and Consensus: Zacks Broadcast Radio and Television
However, the trend in earnings estimate revisions for the Zacks Broadcast Radio and Television industry has not been favorable lately.
Looking at the aggregate earnings estimate revisions, it appears that the loss estimate of $1.09 per share has widened from April 2018.
Current Fiscal Year EPS Estimate Revisions
Zacks Industry Rank Indicates Solid Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term.
The Zacks Broadcast Radio and Television industry currently carries a Zacks Industry Rank #83, which places it at the top 32% of the 256 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 improved in the past five weeks, indicating outperformance in the near term.
Long-Term Growth Prospects Promising
The long-term (3-5 years) EPS growth estimate for the Zacks Broadcast Radio and Television industry appears promising. The group’s mean estimate of long-term EPS growth rate of 16.17% is better than 9.8% for the Zacks S&P 500 composite.
Mean Estimate of Long-Term EPS Growth Rate
In fact, the basis of this long-term EPS growth could be the strong momentum in top-line growth that the Zacks Broadcast Radio and Television industry has been showing since the end of 2014.
Moreover, another indication of solid long-term prospects is the improvement in the group’s EBITDA margin.
However, a surging debt level remains a concern for industry participants.
Currently, only a couple of stocks in the Zacks Broadcast Radio and Television industry carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
AMC Networks, Inc (AMCX - Free Report) : New York-based AMC sports a Zacks Rank #1. The consensus EPS estimate for the company has increased 7 cents to $8.39 for the current year, over the last 30 days.
Price and Consensus: AMCX
Entercom Communications Corp (ETM - Free Report) - The company, headquartered in Bala Cynwyd, PA, has a Zacks Rank #2. The consensus EPS estimate for this radio broadcasting company has remained steady at 94 cents for the current year, over the last 30 days.
Price and Consensus : ETM
However, investors should ignore these stocks in the Zacks Broadcast Radio and Television industry.
Sky Plc (SKYAY - Free Report) - Isleworth, United Kingdom-based Sky with a Zacks Rank #4 (Sell). The consensus EPS estimate for this entertainment and communications provider has remained steady at $4.18 for the current year, over the last 30 days.
Price and Consensus: SKYAY
Entravision Communications Corp (EVC - Free Report) - Headquartered in Sanat Monica, CA, the Spanish-language radio network operator also has a Zacks Rank #4. The consensus loss estimate for the company has remained steady at 6 cents for the current year, over the last 30 days.
Price and Consensus: EVC
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