The Zacks Broadcast Radio and Television industry comprises companies offering entertainment, sports, non-fiction and musical content over television, radio and digital media platforms. These companies majorly derive revenues from the sale of advertising slots as well as subscriptions.
Rapid proliferation of smartphones, improved Internet speed and penetration, and change in consumer viewing pattern have led to the emergence of streaming and video-on-demand services like Netflix (NFLX - Free Report) . This, in turn, has resulted in strong demand for content, which is original, regional, short and suitable for small screens (smartphones and tablets).
Here are the industry’s four major themes:
- Industry participants are bearing the brunt of coronavirus-induced macroeconomic woes and heightened fears of a prolonged recession. The pandemic has bumped up unemployment, which is expected to increase cord-cutting. Moreover, postponement in production threatens to choke supply of new content. Additionally, advertising is a major source of revenues for this industry, which has been badly hit by the coronavirus. Lower ad demand and reduced spending are expected to hurt the top line in the near term. Moreover, the industry players are facing stiff competition from tech companies like Facebook (FB - Free Report) , Twitter, Alphabet (GOOGL - Free Report) -division Google and Amazon for ad-dollars. This has been a major impediment for growth, which is expected to continue marring prospects.
- Increase in cord cutting has forced industry participants to offer “skinny bundles.” These services, which are available through the Internet, often contain fewer channels than a traditional subscription and therefore, are cheaper. The move is in line with changing consumer viewing dynamics as growth in Internet penetration and advancements in mobile, video and wireless technologies have boosted small-screen viewing. The alternative services are expected to keep users glued to their platforms, thereby increasing the need to produce more content. Moreover, coronavirus-led lockdowns and shelter-in-place guidelines that compelled more people to stay at home have significantly increased viewership and audience base. However, the low-priced skinny bundles hurt top-line growth.
- To adapt to the changes in the industry, companies like Fox Corporation (FOXA - Free Report) , ViacomCBS and Discovery (DISCA - Free Report) are coming up with varied content for over-the-top (OTT) services, in addition to linear TV. Additionally, they are adding OTT services to their content portfolio. This is helping companies easily reach a global audience and expand their international user base. This, in turn, attracts advertisers to their platforms, thereby boosting ad revenues. Moreover, the use of services to help advertisers measure their ROI and enhance their use cases is expected to benefit advertisers and industry participants. Also, major leagues and events such as NFL, NHL, Olympics, European Games, EPL and elections attract significant ad dollars. However, cancellation of sports events due to the coronavirus outbreak is a major concern.
- Many industry participants, who are either launching their own OTT services or acquiring other OTT services, are banking on user insights to deliver the right content. Increased digital viewing is making consumer data easily available to companies, thereby allowing them to apply AI and machine learning techniques to create/procure targeted content. The move not only boosts user engagement but also lets industry participants raise prices of their services at appropriate time without the fear of losing subscribers.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Broadcast Radio and Television industry is housed within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #146, which places it in the bottom 43% 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 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 positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions it appears that analysts are pessimistic in this group’s earnings growth potential. Since May 31, 2019, the industry’s earnings estimate for the current year has moved down by almost 36.8%.
Before we present a few stocks you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms S&P 500 & Sector
The Zacks Broadcast Radio and Television industry has outperformed the Zacks S&P 500 composite as well as its own sector in the past year.
The stocks in this industry have collectively returned 4.2% compared with the S&P 500’s rise of 2.2%. However, the Zacks Consumer Discretionary sector has declined 10.5% in the same timeframe.
One Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization), which is a commonly used multiple for valuing Broadcast Radio and Television stocks, the industry is currently trading at 22.55X versus the S&P 500’s 10.79X and the sector’s 9.69X.
Over the past five years, the industry has traded as high as 32.82X and as low as 17.57X, recording a median of 23.78X, as the chart below shows.
EV/EBITDA Ratio (TTM)
Stocks to Watch
The industry participants are expected to benefit from their diversified customer offerings, increased content consumption and Internet penetration, and technological advancement. However, increasing rate of cord-cutting and delay in production of movies and shows due to the coronavirus outbreak are major concerns in the near term.
Currently, none of the stocks in the Zacks Broadcast Radio and Television industry flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
However, Los Gatos, CA-based Netflix, which has a Zacks Rank #2 (Buy), is well positioned to grow in the near term. Shares of the streaming giant are up 38.3% on a year-to-date basis.
The Zacks Consensus Estimate for its 2020 earnings has moved up 6.6% to $6.42 per share over the past 30 days.
Price and Consensus: NFLX
We also present a stock with a Zacks Rank #3 (Hold) that investors may retain in their portfolios for now.
New York-based Fox Corporation is a news, sports and entertainment content provider. The stock has declined 25% on a year-to-date basis.
The Zacks Consensus Estimate for its fiscal 2020 earnings has moved up 6.7% to $2.39 per share over the past 30 days.
Price and Consensus: FOXA