Please ensure Javascript is enabled for purposes of website accessibility

Throw This Stock Away

By Rick Munarriz - Updated Apr 5, 2017 at 7:58PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you find something better, replace it.   

It's time for the music makers to face the music.

Every week I single out a stock that appears heading for trouble. And then I suggest three stocks to replace the potential faller.

I'll go for low-lying fruit this week, singling out an archaic industry that has been suffering in recent years. Digital delivery was supposed to breathe new life into the sector, but even that catalyst is coming under pressure.

Who gets tossed out this week? Come on down, Warner Music Group (NYSE:WMG).

No more green days
Warner went public three years ago at $17 a pop. The company's roster of musical acts was hot, with winners like P. Diddy, Linkin Park, Green Day, and Madonna in tow.

The problem, of course, is that Warner Music came to market five years too late. CD sales peaked in 2000, with the industry moving 942 million discs and generating $13.2 billion in sales that year. We continue to see fewer CDs sold at falling price points.

The labels initially pointed the finger at peer-to-peer MP3 swapping networks. They are still pesky sale stealers today, but the broader reach of legal digital downloads, music subscription services, and royalties from video-sharing sites have vindicated the inevitable dot-com push.

The rub for Warner and its fading cronies is that everything in sum is not enough. Even satellite radio, fattening the royalty-generating power of commercial-free music, isn't working. Sirius XM Radio (NASDAQ:SIRI) continues to grow in popularity. The major labels continue to shrink.

Warner posted a loss from continuing operations for all of fiscal 2008. Revenue inched 3% higher, but WMG has the sluggish dollar to thank for that lucky break. On a constant currency basis, revenue fell by 2% in fiscal 2008.

Music sales were slumping even before the economy hit the skids, so you can guess how this record ends. Analysts see continued losses with revenue declining in both fiscal 2009 and fiscal 2010. In short, we're at least three years away from a turnaround if Warner Music even makes it that far.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave ho. Let's go over the three fill-ins.

  • Live Nation (NYSE:LYV). The concert promoter turned heads when it snatched Madonna from Warner last year. It was the first of the promoter's "360 deals" where it strikes a lucrative contract with a recording star, in exchange for a chunk of CD sales, ticketing revenue, and merchandise sales. Unlike the dinosaur labels that are slowly weaning their way out of media sales, Live Nation gets it. It has struck similar deals with other heavy hitters like Jay-Z. Established artists may not have many more hit records in them, but they are touring beasts heavy on the licensed merchandise sales. As Live Nation takes on both the labels as a taste maker and Ticketmaster (NASDAQ:TKTM) in regional ticketing, Live Nation is one of the few music companies that see the future.
  • News Corp. (NYSE:NWS). Social networking has been a boon to unsigned artists, with News Corp.'s MySpace Music leading the way. Artists no longer need to be handcuffed to restrictive major label deals to make a living playing original music. The major labels have also leaned on social networking to create virtual street teams of fan promoters, but all that has done is give artists the freedom to go it alone. Save for the 360 deals that Live Nation has brokered in the past -- where label and artist are true partners in the venture -- MySpace Music is why there are so many good artists offering free downloads and sidestepping the major label product that they are devaluing.
  • Apple (NASDAQ:AAPL). Retail is all about digital delivery these days. Even a superstore CD merchant like Best Buy (NYSE:BBY) acknowledged that with its recent acquisition of music subscription service Napster. Apple isn't just the dominating leader in digital download sales. Earlier this year Apple became the country's leading retailer of music, period. With its iTunes ecosystem feeding the earbuds of music fans with a perpetually widening music catalog, Apple is the digital power broker. Sure, iPod sales have slowed lately, but that only means that the iTunes-handshaking iPhone is the new workhorse. Either way, Apple keeps rocking.

Other headlines out of the weekly dumpster:

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Sirius XM Holdings Inc. Stock Quote
Sirius XM Holdings Inc.
$6.17 (-0.24%) $0.01
Apple Inc. Stock Quote
Apple Inc.
$142.03 (0.26%) $0.37
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
$72.61 (-2.79%) $-2.08
Twenty-First Century Fox, Inc. Stock Quote
Twenty-First Century Fox, Inc.
Live Nation Entertainment, Inc. Stock Quote
Live Nation Entertainment, Inc.
$85.75 (-1.21%) $-1.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.