The Zacks Film and Television Production and Distribution industry comprises film studios and exhibitors. This intensely competitive industry is very much hit-driven as it is significantly dependent on box office performance of the films as well as the ratings of television shows.
Industry participants are investing heavily to develop original and fresh content to attract movie goers as well as streaming and on-demand video service providers. The increasing demand for over-the-top (OTT) services bodes well for film and television production studios.
Moreover, exhibitors are putting in concerted efforts to offer improved customer experience through innovative laser-based projection systems. However, evolution of alternative motion picture distribution channels such as home video, pay-per-view, streaming services, video-on-demand, Internet and syndicated and broadcast television are hurting exhibitors.
Further, continuing consolidation in the industry doesn’t bode well for investors.
Industry Returns Are Positive
The Zacks Film and Television Production and Distribution 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 47.1%, the Zacks S&P 500 Composite and Zacks Consumer Discretionary Sector have increased 18% and 8.7%, respectively.
One-Year Price Performance
Stretched Valuation a Concern
However, the Film and Television Production and Distribution industry’s valuation looks stretched 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 31.33, which is expensive when compared with the market at large, as the forward 12-month P/E ratio for the S&P 500 is 20.11 and the median level is 20.14.
Price-to-Earnings Ratio (F12M)
Moreover, a comparison of the group’s P/E ratio with that of its broader sector ensures that the group is trading at a huge premium. The Zacks Consumer Discretionary Sector’s forward 12-month P/E ratio of 24.55 and the median level of 25.29 for the same period are way above the Zacks Film and Television Production and Distribution Industry’s ratios respectively.
Price-to-Earnings Ratio (F12M)
Improving Earnings Outlook to Drive Outperformance
The Zacks Film and Television Production and Distribution industry is trying hard to keep pace with changing consumer preference in terms of content. The industry is benefiting from an improved consumer confidence, which reached its highest level since October 2000, in August.
Plentiful job supply and improving business conditions are expected to drive income levels in the near term. Higher consumer disposable income and spending also bodes well for the Film and Television Production and Distribution industry.
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 Film and Television Production and Distribution 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: Film and Television Production and Distribution
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 $1.03 EPS estimate for the industry for 2018 is not the actual bottom-up EPS estimate for every company in the Zacks Film and Television Production and Distribution 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 $1.03 EPS estimate for 2018 has increased from the end of June. In other words, the sell-side analysts covering the companies in the Zacks Film and Television Production and Distribution industry have been optimistic 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 Film and Television Production and Distribution industry currently carries a Zacks Industry Rank #200 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.
Long-Term Growth Prospects Promising
The long-term (3-5 years) EPS growth estimate for the Zacks Film and Television Production and Distribution industry appears promising. The group’s mean estimate of long-term EPS growth rate of 12.38% is better than 9.82% 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 can be attributed to the strong momentum in top-line growth that the Zacks Film and Television Production and Distribution industry has been exhibiting since the end of 2017.
A slow market growth rate in the near term could weigh on the prospects of the Film and Television Production and Distribution industry. Below are couple of stocks that carry a bearish Zacks Rank that we would recommend investors to stay away from for the time being.
Eros International - Douglas, the U.K.-based Eros carries a Zacks Rank #4 (Sell). The stock has returned 26.5% year-to-date.
Price and Consensus : EROS
Lions Gate Entertainment ((LGF.A - Free Report) - Santa Monica, CA-based Lions Gate is a film studio. The stock has lost 29.4% on a year-to-date basis.
Price and Consensus: LGF.A
However, iQIYI Inc. (IQ - Free Report) is a stock that investors can buy to gain a footing in this industry. Haidian, China-based iQIYI provides online entertainment service and has returned 95.5% since its initial public offering (IPO). The company carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: IQ
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