2016 has been a mixed year for media stocks as the industry continues to struggle with the rise of cord-cutting. However, a number of traditional content providers outperformed the S&P 500 thanks to merger hopes and bullish expectations following the presidential election.
As you can see from the chart below, the major television providers' results were scattered across a wide range.
|Company||Market Cap||2016 Performance|
|Time Warner (NYSE: TWX)||$74.6B||49.6%|
|CBS (NYSE: CBS)||$27.9B||37.6%|
|Comcast (NASDAQ: CMCSA)||$169.8B||25.6%|
|Discovery Communications (NASDAQ: DISCA)||$13B||5.4%|
|21st Century Fox (NASDAQ: FOX)||$52.1B||2.4%|
|Walt Disney Co (NYSE: DIS)||$167.5B||0.1%|
|AMC Networks (NASDAQ:AMCX)||$3.7B||(29.5%)|
Time Warner's shares surged on its pending merger with AT&T (NYSE: T), and CBS has also benefited from speculation about a merger with Viacom or another potential partner. Comcast's earnings have continued to grow in large part due to expanding broadband usage.
At the other end of the spectrum, smaller networks like Viacom and AMC Networks suffered as the market seems to view their assets as being less valuable in the event of continued industry consolidation.
Let's take a closer look at what's plaguing both companies.
One version of Walking Dead
AMC Networks, the parent of cable networks including AMC, IFC, BBC America, and Sundance, has had its share of critically acclaimed shows over the years, including Mad Men, Breaking Bad, and The Walking Dead. However, the stock's performance has been troubled in recent years. Despite the steady factory of hit shows and having five of the top 10 shows on basic cable, the company has seen revenues stagnate due to competition from Netflix and other such streaming outlets.
In the third quarter of this year, revenue increased just 0.4%, and had grown 6.5% for the first nine months of 2016. Adjusted operating income, meanwhile, fell 12% in the third quarter, but grew 4% through the year. Adjusted earnings per share have fallen from $4.07 to $3.79, in part due to a $50 million loss on extinguishment of debt.
In addition to falling profits, investors fear that the network's best-known shows have passed their peak. The Walking Dead is already in its seventh season and has seen ratings decline this year. Earlier in the year, the company said it would cut as many as 200 employees due to weak ratings, and the network received a couple of key downgrades in recent years. After the stock's slide this year, AMC's price-to-earnings ratio sits at just 11, meaning 2017 should bring more stability.
Merger falls apart
The other loser this year among traditional media companies has been Viacom, which has sold off 10% with a few days left in 2016. The parent of networks including Comedy Central, MTV, and Nickelodeon traded near flat for most of the year, but dove after a potential merger with CBS broke up. Investors seemed to see Viacom as the weaker chip in the bargain, and pushed CBS stock up even as Viacom shares fell 8%.
The news came after Shari Redstone, daughter of Viacom Chairman Sumner Redstone, withdrew her support for the merger, which followed an earlier statement by CBS CEO Les Moonves, saying his company was not interested in pursuing a merger. Later in the month, Sumner Redstone said he would resign as chairman early next year.
Mergers have been popular in the media space as companies look to match distribution with content, as in the AT&T-Time Warner deal, and both Disney and Comcast, the two giants in the industry, have beefed up their capabilities in recent years. So it was surprising to see the CBS-Viacom deal fall through.
Outside of the CBS drama, financial results were down sharply in fiscal 2016 for Viacom as revenue fell 6% and adjusted EPS dropped 32% to $3.68. Part of the decline in profits was due to weakness in its Paramount Pictures division, as interim CEO Tom Dooley said that ratings had stabilized. Like AMC, Viacom shares are cheap at a P/E of 10, and it will face similar challenges next year. Both companies are at a distribution disadvantage as pay-TV subscribership falls.
For the industry as a whole, current trends are likely to persist through 2017 as cord-cutting and consolidation continues. The outcome of the AT&T-Time Warner deal could weigh on the rest of the industry, as regulatory approval would encourage struggling media companies to pursue the same solutions.