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Bleak Near-Term Outlook for Audio Video Production Industry

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The Zacks Audio Video Production industry comprises manufacturers of televisions, speakers, video players and camcorders. It also includes companies offering gaming consoles, drones and high-end cameras for individuals and industrial markets across the globe. These firms offer state-of-the-art audio, imaging and voice technologies that transform entertainment and communication at theaters, home, work and mobile devices. Some of the firms also design and manufacture audio and imaging products, including digital cinema servers and related products for film production, cinema, television, broadcast and entertainment industries.

Apart from providing a host of services for theatrical and television production for cinema exhibition, broadcast and home entertainment, the industry participants serve film studios, content creators, post-production facilities, cinema operators, broadcasters and video game designers. Some players even have substantial presence in the music and image-based software markets worldwide.

Let’s take a look at three major themes in the industry —

•    Gradual shift from analog to digital technology over the past several years has met the demand for high resolution video, reduced the problems of radio frequency and electromagnetic interference, making audio visual systems more data network friendly. Wireless transmission has enabled broadcast of audio video signals via wireless data networks in a seamless manner, while optimizing overall productivity. The industry intends to keep providing valuable services to a variety of media producers. In the midst of all these, one of its major concerns is the easy online accessibility of recording equipment and widespread availability of distribution channels on the Internet.

•    In the United States, smart-connected televisions, microphones and speaker enclosures are the most popular electronic devices among customers. But the U.S. manufacturers of audio and video systems continue to face severe competition from importers of relatively low-priced devices, particularly from China, Vietnam and Mexico. Also, sharp decline of music sales has taken a toll on the industry’s prospects. Notwithstanding all these, companies are investing in tomorrow’s technology solutions that create better communication experiences. Higher R&D costs have, in turn, led to soft margins as the companies battle intense price wars.

•    Rapid changes due to technological obsolescence of products lead to a plethora of challenges (and opportunities), as the ecosystem continues to transform in the digital age. The fast-evolving industry has called for constant technological innovation, which necessitates the industry participants to continuously come up with state-of-the-art technology to stay ahead of the curve. Keeping up with changing consumer and licensee demand and shifting standards render the industry vulnerable to material operating risks. Most of the players are coming up with innovative business model to acquire customers and scale up fast. Further, the proliferation of digital music downloads, streaming music and online piracy has negatively impacted top-line growth.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Audio Video Production industry, which has 10 constituent companies, is housed within the broader Zacks Consumer Discretionary sector. It currently carries a Zacks Industry Rank #152, which places it at the bottom 40% of more than 250 Zacks industries.

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

Now, the industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing faith in this group’s earnings growth potential.

The industry’s earnings estimates for the current year have decreased 15.9% over the past year, while the same for the next year has declined 26.8%.

Before we present a few audio video production stocks that are well positioned to outperform the market (despite broader challenges) based on a strong earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Trumps Sector, Lags S&P 500

The Zacks Audio Video Production industry has outperformed the broader Zacks Consumer Discretionary sector, but lagged the S&P 500 composite over the past year.

The industry has lost 0.5% over this period against the S&P 500’s rise of 0.7% while the broader sector has lost 2.4%.

One-Year Price Performance

Industry’s Current Valuation

Price-to-Sales ratio is commonly used for valuing audio video production stocks. The industry currently has a forward 12-month P/S of 0.74X compared to the S&P 500’s 3.05X. It is also below the sector’s forward 12-month P/S of 2.07X.

Over the past five years, the industry has traded as high as 0.77X and as low as 0.05X with the median of 0.56X, as the chart below shows.

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

Bottom Line

The audio-visual industry is expected to benefit from healthy long-term growth dynamics supported by improving macroeconomic climate, technological advancements and increase in consumer spending. However, profitability of individual companies largely depends on manufacturing efficiency and effective marketing and distribution process.

The industry appears to be stifled by several operational headwinds in the near term. In addition, changing consumer preferences, licensee demand, shift in industry standards and rapid obsolescence of existing technologies pose potential operating risks to the ecosystem.

None of the stocks in the space currently caries a Zacks Rank #1 (Strong Buy) or #2 (Buy). So, we are presenting four stocks with a Zacks Rank #3 (Hold) that investors may consider betting on now due to healthy fundamentals. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dolby Laboratories, Inc. (DLB - Free Report) : Shares of this San Francisco, CA-based audio video production firm have rallied 16% in the past two years. The consensus estimate for current-year earnings for this stock has increased 3.8% in the past 60 days. The company has long-term earnings growth expectation of 13%.

Price and Consensus: DLB

GoPro, Inc. (GPRO - Free Report) : The stock of this San Mateo, CA-based audio video production firm has gained 0.3% year to date. The Zacks Consensus Estimate for current-year earnings for this stock has moved up 2.6% in the past 60 days. The company has long-term earnings growth expectation of 10%.  

Price and Consensus: GPRO

Sonos, Inc. (SONO - Free Report) : Shares of this Santa Barbara, CA-based audio video production firm have rallied 18.6% year to date. The Zacks Consensus Estimate for current-year earnings for this stock has increased 96.4% over the past year. The company delivered average positive earnings surprise of 35.2% in the trailing four quarters.

Price and Consensus: SONO

Sony Corporation (SNE - Free Report) : Shares of this Tokyo, Japan-based audio video production firm have rallied 15.2% year to date. The Zacks Consensus Estimate for the current fiscal-year earnings for this stock has moved up 5.3% in the past 60 days. The company has long-term earnings growth expectation of 7.7%.

Price and Consensus: SNE

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