Diversion is one commodity whose supply is inexhaustible. God only knows the number of hours wasted on Twitter, Facebook, YouTube, and MySpace, not to mention the endless hours wasted tangentially Googling. The hours likely are more than we imagine, given that we no longer need to be tethered to a bulky PC or an inconvenient laptop, thanks to very portable iPhones, BlackBerrys, and netbooks.
The Internet's ability to pull us further from quiet contemplation will only increase. At least the advertisers think so. According to GroupM, a division of advertising giant WPP (NASDAQ:WPPGY), Internet advertising will increase its share of U.S. advertising to 17% ($24.4 billion) in 2010, up from 15.4% this year and 13.9% in 2008.
The end's not quite here
What does that mean for the traditional diversion -- television? Well, television has been bruised by the economic downturn. Ads purchased in the top 100 markets dropped 17.4% in the first half of 2009. Lesser markets fared even worse. The 101st- to 210th-largest TV markets dropped 32.1% compared with the first six months of 2008, so Nielsen Co. reports. The decline could be permanent. Sir Martin Sorrell, WPP's CEO, expressed doubt that free-to-air television advertising spending will "ever be the same again," according to The Wall Street Journal.
Sir Martin might be right, given the proliferation of channels over cable. Or maybe not; the traditional networks are no longer 100% traditional. The three cable channels grabbing the most viewers (at least for the week of Sept. 14 – 20) -- ESPN, USA, and Fox News -- are all owned by one of the major networks. Meanwhile, Hulu, a commercial-supported streaming-video website, is majority owned by NBC, Fox, and ABC.
What's more, time spent in front of the boob tube continues to grow in aggregate, according to Nielsen. I believe investors have been slow to acknowledge the trend. Many of the old-school television media have been dinged, and a few pummeled, in the past year. But that's good news for investors; pristine merchandise rarely goes on sale.
Personality trumps immediate prospects
I'm a contrarian, so I'm attracted to the ugly, and it doesn't get much uglier than CBS (NYSE:CBS), which was split from Viacom (NYSE:VIA) in 2006. It's obviously known for the CBS network, but little else. Its cable properties are relatively sparse, with Showtime being the recognizable name. Television accounted for 64% of the company's $13.95 billion revenue for 2008 and about half of its $12.16 billion operating loss. Such losses make the company's $6.96 billion long-term debt loom large.
To state the obvious, "the Tiffany Network" has lost its luster, further seen with it making Audit Integrity's top 20 list of companies with $1 billion in market cap most likely to file for bankruptcy protection in the next 12 months. Little wonder the company is trading at $11 and change, a 69% discount from the July 2007 all-time high of $35. But CBS is led by a hard-charging octogenarian with a successful history, Sumner Redstone. And let's remember we are talking about a company that takes in more than $13 billion in revenue, which could easily grow this year based on robust viewer growth in the nascent fall season.
News Corp. (NYSE:NWS) is another notable laggard that receives roughly 46% of its $30.42 billion in annual revenue and $2.34 billion in operating losses from its television and programming operations. News Corp. is controlled by its maverick chairman, Rupert Murdoch. The stock is down 50% from its five-year high of $25.34, set in February 2007, while its long-term debt stands at $12.2 billion, so there is significant financial risk.
That said, I have faith in Murdoch, the consummate dealmaker. After all, it was Murdoch who brought the NFL to Fox television and brought The Wall Street Journal, one of the few newspapers to charge for Internet content, into the fold. Like CBS, News Corp. should thrive as well as any media company when the ad dollars return.
Keeping with the cult-of-personality-television theme, I'm also attracted to World Wrestling Entertainment (NYSE:WWE). OK, so it's not a network, but its bailiwick is creating television content. Besides, I love the liquid balance sheet, which sports negligible long-term debt and $208 million in cash, or $2.86 a share. And I like the CEO, Vince McMahon, who is as valuable to World Wrestling Entertainment as Warren Buffett is to Berkshire Hathaway (NYSE:BRK-A). The company agrees. According to its 10-K annual filing with the SEC: "The loss of Mr. McMahon due to unexpected retirement, disability or death or other unexpected termination for any reason could have a material adverse effect on our ability to create popular characters and creative storylines, which could adversely affect our operating results."
Most of all, I love the company's dividend. A lot of hay is made over the fact that the annual dividend isn't covered. Yes, $81 million was paid in dividends, and operating cash flow was only $36 million, but I expect cash flow to pick up in 2010 with the pickup in advertising spending, so I expect the dividend to survive.
What have you done for me lately?
Not much, so far; recent revenue and profitability numbers suggest that these media/television stocks should be canceled. But we don't invest on past numbers, we invest on tomorrow's expected numbers. On that front, I think investors are overdiscounting tomorrow's numbers for these three stalwarts.
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