The house rules are simple in this weekly column.
- I bash a stock that I think is heading lower.
- I offset the sting by recommending three stocks as portfolio replacements.
Who gets tossed out this week? Come on down, Warner Music Group
The song remains the same
This is getting to be a broken record.
There just isn't too much of a point in being a major label these days. A generation ago, musical artists needed to sign with a major if they wanted radio airplay and a video on MTV. These days, the playing field is level. YouTube, MySpace, and reality shows are the new career launching pads. Labels are so CBGB they should give investors the heebie-jeebies
The quality of home recording systems continues to improve at much lower price points. The days of begging a major label for a six-figure advance to record a CD are history.
Don't take my word for it, though. Check out WMG's latest financials.
The label behind Green Day, Jason Mraz, and Paramore is smarting these days. WMG's stock fell nearly 8% yesterday, after the company posted a widening loss in fiscal 2010. Revenue fell by 9% to below $3 billion on a constant-currency basis, as a 7% gain in digital music sales wasn't enough to offset a much steeper slide in CDs.
Life isn't easy when you have to fork over $190 million of the $90 million in operating profits to cover the interest payments on your more than $1.9 billion in long-term debt. Free cash flow was surprisingly positive, but it's just a matter of time before that begins to bleed. WMG is playing a game where it's trying to cut costs to keep pace with its shrinking revenue.
This is a sad race to zero. You don't want to be long anywhere near the finish line.
You don't need a label! When I was young, my band was signed to a major. We wouldn't have charted on Billboard's club play chart without the help of Sony's Columbia Records. It's just not necessary these days.
My nephew is blowing up the South Florida rock scene with his band. Naked Vengence -- the typo is intentional -- is playing at all of the local live music venues, reaches out to new fans through social network sites, and is currently laying down tracks for the band's first record. Getting signed may be nice, but it's no longer a priority. Musical artists can dictate their own terms. When Paul McCartney can release a studio album through Starbucks
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.
(Nasdaq: CKXE): I mentioned reality shows as a launching pad, and CKX is the company with proprietary rights to American Idol and all of the regional adaptations as well as So You Think You Can Dance. It also operates Graceland and owns the rights to the name, image, and likeness of Elvis Presley. Revenue has dipped by 5% through the first nine months of 2010 and its operating profit has fallen sharply. However, I still like CKX's chances to bounce back a lot better than I do WMG and its fellow labels.
Sirius XM Radio
(Nasdaq: SIRI): Another reason that major labels are no longer necessary is that satellite and Internet radio have deeper play lists. It's no longer about a limited number of tunes in heavy rotation. Deeper dives into musical genres give indies and even unsigned artists a shot at national airplay. For its part, Sirius XM is now a profitable media company that's about to top 20 million subscribers. It's at the mercy of the automaker industry for new installations, but today's well-received General Motors (NYSE: GM)IPO proves that Michigan is rolling again.
(Nasdaq: GOOG): I've included Apple as a replacement all three times that I have trashed WMG. What can I say? I think Apple rocks as an investment. However, I'll break from the routine by going with Google this time. How is the world's leading search engine a label killer? Well, its own YouTube has launched the careers of Greyson Chance, Bo Burnham, Soulja Boy, and even Justin Bieber. However, Google also offers artists with pocket change to spare a chance to attract new listeners through its AdWords online advertising platform. Google is the global leader in search and online advertising -- and an ally to anyone trying to take advantage of the Internet's power to level the playing field and make a demo tape stream just a mouse click away. Now let's see if Google Music can reinvent the dying wheel.
I'm sorry, WMG. I see more red days than Green Day in your future.
Google is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers selection. Apple and Starbucks are Motley Fool Stock Advisor picks. The Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
Longtime Fool contributor Rick Munarriz doesn't mind taking out the garbage every so often. He does not own 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.