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4 Stocks to Watch From a Prospering Entertainment Industry

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The Zacks Film and Television Production and Distribution industry is benefiting from a spike in demand for digital entertainment, fueled by lingering capacity and operational limitations in movie theaters, theme parks and cruise lines. Increased consumption of media, music and news over the web, triggered by the work-and-learn-at-home wave, has been a key catalyst for industry participants like World Wrestling Entertainment (WWE - Free Report) , iQIYI (IQ - Free Report) , IMAX Corporation (IMAX - Free Report) and CuriosityStream (CURI - Free Report) . Companies have been focusing on a superior product strategy and prudent capital investments. Steady recovery in the advertising spending environment and resumption of production pipelines bode well for film and television production companies.

Industry Description

The Zacks Film and Television Production and Distribution industry comprises companies involved in film and TV production, distribution and exhibition. The main activities of the industry participants include the production and distribution of entertainment content to theaters, TV networks, video-on-demand platforms, streaming services and other exhibitors. Imax offers entertainment technology and specializes in motion picture technologies and presentations. Industry participants produce and distribute motion pictures for theatrical and straight-to-video releases besides TV programming. These players are heavily dependent on the box-office performance of their films, both domestically and internationally, the number of film releases and the ratings of TV shows.

3 Film and Television Production Industry Trends in Focus

Over-the-Top Services Gaining Prominence: Companies involved in content creation are looking to distribute content through over-the-top services to leverage the popularity of their franchises. With this, they are looking to provide exclusive content and a differentiated experience. However, streaming companies are increasingly producing original and award-winning feed to reduce licensing costs and excessive dependence on third-party content providers. This is likely to hurt industry participants’ content distribution strategy.

Binge-Watching Driving Consumption: Factors such as binge-watching, deepening Internet penetration and advancement in mobile, video, and wireless technologies have got viewers glued to small screens. In order to keep pace with new consumption patterns, industry participants are turning to digital content distribution. The emergence of digital capabilities is making consumer data easily available to companies. With the use of AI tools, production houses are gaining a better understanding of user preferences. This helps them produce content that strikes a chord with viewers. However, increasing spending on content and sales & marketing is hurting profitability due to stiff competition from streaming players.

Technological Advancement Aids Prospects: Exhibitors are turning to highly efficient and cost-effective technologies like laser-based projection systems to enhance image quality and the entire movie experience. Additionally, the use of technologies like motion seating, immersive audio systems and interactive movies among others is expected to enhance the viewing experience. The increasing adoption of AR and VR technologies bodes well for industry participants. However, the 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 is hurting exhibitors.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Film and Television Production and Distribution industry is housed within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #80, which places it in the top 32% of more than 249 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. 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.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic on this group’s earnings growth potential. Since Jan 31, 2022, the industry’s earnings estimate for 2022 has moved up 19.7%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Beats S&P 500, Sector

The Zacks Film and Television Production and Distribution industry has outperformed the Zacks S&P 500 and its own sector in the past year.

The stocks in this industry have collectively lost 7.8% compared with the S&P 500’s decline of 11.2% and the Zacks Consumer Discretionary sector’s decline of 19% over the same time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month price-to-sales (P/S), a commonly used multiple for valuing Film and Television Production and Distribution stocks, the industry is currently trading at 1.59X compared with the S&P 500’s 3.62X and the sector’s 1.99X.

Over the past five years, the industry has traded as high as 2.48X and as low as 0.92X, recording a median of 1.49X as the chart below shows.

Trailing 12-Month Price-to-Sales (P/S) Ratio

4 Film & Television Stocks to Watch Right Now

iQIYI: The company offers movies, television dramas, variety shows and other video content. Recently, the company entered into a definitive agreement with Douyin, pursuant to which it will license select content to Douyin for editing and distribution as short-form videos in the formats agreed on by the two companies.

The company already has a huge subscriber base in China, which is one of the biggest consumer markets in the world. Strong demand for company-produced drama series, original movies and variety shows in international markets is a key top-line growth driver for the near term.

iQIYI’s shares have returned 52.8% in the past year. The Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company’s 2022 loss has widened to 5 cents per share over the past 30 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: IQ

IMAX: This Zacks Rank #3 (Hold) company is riding on the continued reopening of theaters, particularly in the United States. Markedly, Avatar: The Way of Water ended 2022 as the highest-grossing release of the year in IMAX and total IMAX global box office collection was $160 million. The impressive performance of Thor: Love and Thunder, Top Gun: Maverick also benefited IMAX.

Last week, IMAX announced that it recorded its second-best opening day in China on the occasion of the Chinese Lunar New Year with a collection of $7 million across the IMAX China network. Frank Guo’s big-budget science fiction movie, The Wandering Earth 2, earned most of it as it totaled $6 million, which was nearly double the opening day haul for its predecessor, The Wandering Earth.

Recovery in the pace of theater system installations and higher IMAX maintenance sales are major positives. Imax also entered into an agreement with China’s Wanda Films last year to install six new multiplexes across the country and relocate and upgrade three existing cinema halls. Imax also plans to open seven cinema halls in Japan by summer 2023, in collaboration with Aeon Entertainment after seeing growth in Japan's box office market.

The Zacks Consensus Estimate for IMAX’s 2022 earnings has been steady at 3 cents per share over the past 30 days. IMAX’s shares have declined 11.6% in the past year.

Price and Consensus: IMAX

World Wrestling Entertainment: WWE has been gaining from the return of live events, as pandemic-led restrictions ease. The company expects to generate record revenues in 2022, owing to ticketed live events, staging of additional large-scale international events, higher rights fees for flagship programs, Raw and SmackDown, along with monetization of new, original series.

The company raised its full-year OIBDA guidance. Management expects 2022 adjusted OIBDA to be at the upper end of the earlier projected range of $370-$385 million. WWE also announced a multi-year deal with its long-standing partner, the Foxtel Group, to expand content distribution in Australia. It also announced the creation of NXT Europe, slated to be launched next year, to expand the NXT brand internationally.

Markedly, WWE has been expanding its reach across platforms such as Peacock and Spotify and establishing new sponsors and product partners. WWE’s diversified distribution approach helps it in attaining solid viewership.

Shares of this Zacks Rank #3 company have risen 70% in the past year. The Zacks Consensus Estimate for World Wrestling’s 2022 earnings has remained steady at $2.57 per share over the past 30 days.

Price and Consensus: WWE

CuriosityStream: The company features more than 10,000 titles and has embarked on an original production and content acquisition plan. Continued strength in direct subscription revenues and contributions from program sales and sponsorships/advertising are expected to remain key catalysts.

The company is benefiting from its unique content distribution strategy through its solid partner base. Through the end of 2022, the company is expected to have invested more than $188 million in original productions and acquired content. The company has invested over $15-20 million in acquisitions like One Day University and Learn25 and partnerships like Spiegel and Nebula, which brought additional content into the company’s content ecosystem.

The Zacks Consensus Estimate for this Zacks Rank #3 company’s 2022 loss per share has remained steady at 82 cents per share over the past 30 days. CuriosityStream’s shares have declined 63% in the past year.

Price and Consensus: CURI

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