As a fan of stocks and music, I always enjoy mixing the two in a single article. Unfortunately, this is the weekly column where I slam a stock to bits, which means I'm about to go all Unplugged on a music maker.
But while I may rip a company to shreds, I'll come right back for an encore with three stock picks that I think will be better replacements in your portfolio.
Who gets tossed out this week? Come on down, Warner Music Group
It's a cacophony
These aren't merry days for the prerecorded music industry.
Take Warner rival EMI, for example. Earlier this week, EMI agreed to part ways with band OK Go after the viral-video masters scorched their label's video-sharing policies in an op-ed piece. It's also losing in the courtroom, where it may have to pull Pink Floyd tracks from downloading sites because it's not allowed to sell songs piecemeal without the band's permission, according to its pre-iTunes contract.
WMG may not have as many grease fires to put out, but since EMI is not public, we may as well pick on the label behind Michael Buble, Enya, and Muse.
WMG was the subject of this column 15 months ago. I was early. The stock has more than doubled since then -- as many beaten stocks have over the past year. The fundamentals haven't merited a spike. In fact, WMG is only getting worse. Revenue in fiscal 2009 fell by 9%, dragged down by a 12% domestic hit.
Now that digital downloads account for more than one-third of total revenue at WMG, one would expect the promised benefits of the platform to materialize. Downloads don't require pressing, packaging, and shipping CDs around the planet. There are no costly returns to junk. Unfortunately, the hoped-for profits aren't materializing. Losses from continuing operations widened in fiscal 2009, and the red ink will continue. Analysts don't see a profit here until fiscal 2012 at the earliest.
Along the way, the industry will continue to diminish in scope. Just as OK Go's departure to create its own label illustrates, the playing field has been leveled. A band doesn't need to be signed to a major label to get noticed. We live in a time where social networks, video-sharing sites, and reality television are breaking the music stars.
Sorry, WMG. We can all name that tune.
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.
Plenty of well-known companies are selling digital downloads these days. Amazon.com
2. Best Buy
The consumer electronics superstore sells digital downloads and runs the Napster music subscription service, but that's not why I like it. There will always be a hardware component to music consumption, and Best Buy is there to sell MP3 players, smartphones, and laptops to play those downloads. Best Buy has also been making a push into musical instruments and recording gear, realizing that the music industry's leveled playing field opens the door to big-ticket purchases by garage-band dreamers, who are now a MySpace upload away from creating a global demo tape.
3. Sirius XM Radio
Satellite radio had a setback early last year when Sirius XM teetered on bankruptcy and subscriber counts declined, but everything is back on track now. The satellite-radio operator is growing again, and it posted break-even results in its latest quarter. With dozens of commercial-free music stations, it's encouraging consumers to move away from the biggest artists on major labels, who benefitted the most from terrestrial radio's thin, ad-laden playlists.
With the world marching to so many beats these days, it'll be hard for major-label drummers to get heard.
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Longtime Fool contributor Rick Munarriz was on a major label 20 years ago. He has no regrets, but sheds no tears over the industry's fadeout. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.