The Zacks Media Conglomerates industry is witnessing rapid evolution in alternative distribution channels for broadcast and cable programming.
Media Conglomerates have been negatively impacted by decline in ratings for broadcast television, reduction in demand for home entertainment sales of theatrical content and fall in subscriber base across the industry.
Additionally, industry participants are investing heavily to develop original and fresh content to attract and retain subscriber base. However, pricing remains subdued owing to stiff competition from streaming and on-demand video service providers, consequently hurting top-line growth.
Moreover, consumer’s unfavorable disposition, particularly toward advertising, has hit the industry participants hard. Media companies 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, continuing consolidation in the industry doesn’t bode well for investors.
Industry Lags on Shareholder Returns
Looking at shareholder returns over the past year, it appears that a tough operating environment has been hurting investor sentiments in the Zacks Media Conglomerates industry’s growth prospects.
The Zacks Media Conglomerates Industry, within the broader Zacks Consumer Discretionary Sector, has underperformed both the S&P 500 and its own sector over the past year.
While the stocks in this industry have collectively gained 7.7%, the Zacks S&P 500 Composite and Zacks Consumer Discretionary Sector have increased 17.4% and 8%, respectively.
One-Year Price Performance
Media Conglomerates Stocks Trading Cheap
The Media Conglomerates industry’s valuation looks cheap at the moment. One might get a good handle on the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which essentially displays how much an investor is willing to pay for each unit of earnings.
Notably, a lower P/E ratio is always better.
The industry currently has a forward 12-month P/E ratio of 14.91, which is in line with the median level over the past year.
The space also looks inexpensive when compared with the market at large, as the forward 12-month P/E ratio for the S&P 500 is 17.35 and the median level is 17.63.
Price-to-Earnings Ratio (F12M)
Moreover, a comparison of the group’s P/E ratio with that of its border sector ensures that the group is trading at a significant discount. The Zacks Media Conglomerates Sector’s forward 12-month P/E ratio of 19 and the median level of 19.78 for the same period are way above the Zacks Media Conglomerates Industry’s respective ratios.
Price-to-Earnings Ratio (F12M)
Earnings Outlook Suggests Less Room for Growth
The Zacks Media Conglomerates industry is witnessing a sea change on the back of rapid evolution of distribution platforms as well as entrance of players and the latest technologies.
Industry participants are trying hard to keep pace 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 Media Conglomerates 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 Media Conglomerates industry
This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Please note that the $4.04 EPS estimate for the industry for 2018 is not the actual bottom-up EPS estimate for every company in the Zacks Media Conglomerates industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the EPS of the industry for 2018, but how this projection has evolved recently.
Current Fiscal Year EPS Estimate Revisions
As you can see here, the $4.04 EPS estimate for 2018 has declined from the end of June. In other words, the sell-side analysts covering the companies in the Zacks Media Conglomerates industry have been pessimistic about raising their estimates.
Zacks Industry Rank Blurs Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term.
The Zacks Media Conglomerates industry currently carries a Zacks Industry Rank #199 which places it at the bottom 22% 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.
A slow market growth rate and change in consumer preferences could weigh on the prospects of the Media Conglomerates industry. Below is a stock that carries a bearish Zacks Rank that we would recommend investors to stay away from for the time being.
The Walt Disney (DIS - Free Report) : Burbank, CA-based Disney carries a Zacks Rank #4 (Sell). The stock has returned a meager 4.6% over the past year. The consensus EPS estimate for the company has moved south by 2.1% for the current year, over the last 30 days.
Price and Consensus: DIS
However, there are couple of stocks that investors can hold on to gain a footing in this industry. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Pearson : The media company has a Zacks Rank #3 (Hold). The stock has returned 52.5% over the past year. The Zacks Consensus Estimate for the current-year EPS has remained steady at 66 cents over the last 30 days.
Price and Consensus: PSO
Viacom (VIAB - Free Report) : The consensus EPS estimate for this global media company has increased almost 1% to $4.10 over the last 30 days. The stock rallied 11.6% over the past year. It carries a Zacks Rank #3.
Price and Consensus: VIAB
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