"Unloved" is usually a temporary state on Wall Street. Sectors fall in and out of favor about as often as fad diets and fashion trends. As long as a depressed company hasn't been damaged irreparably, and it's toiling away in a sector that isn't on the cusp of obsolescence, a turnaround may just be a corner away.
That's why I'm intrigued by the current state of media stocks. They entertain us with their content programming, but investors have turned their backs on the industry's key players.
| 12/31/04 | 11/15/05 | Gain/Loss | |
|---|---|---|---|
|
Viacom |
$36.86 | $32.81 | -11.0% |
|
Disney |
$27.80 | $26.06 | -6.3% |
|
News Corp. |
$19.09 | $15.30 | -19.9% |
|
Time Warner |
$19.39 | $17.62 | -9.1% |
It's pretty grim. Viacom announced that it is splitting into two separate companies to maximize shareholder value -- and Viacom shareholders split. They're gone. Does anyone out there actually own shares of Viacom? If you do, how many of you are willing to own up to owning a stock that has cratered in recent years? Since the end of 2003, Viacom has shed a quarter of its value. That can't be right. If content is king, why are media stocks being beheaded?
What did Viacom do wrong? CBS is stronger today than it was two years ago. Other Viacom appendages like Nickelodeon, MTV, BET, and Paramount seem to be doing just fine.
Let's go to Disney. Thanks to hit shows like Desperate Housewives, Lost, and Grey's Anatomy, ABC is a network powerhouse again. Disney and Viacom own that space these days. During the first week of November, CBS and ABC accounted for the dozen most-watched television shows.
Of course, there is more media muscle to Disney than ABC. ESPN couldn't be any hotter. The Disney Channel is a cable and satellite programming staple. The company owns the widest library of family entertainment, thanks to decades of live-action features and animated classics. It doesn't hurt that Disney also happens to run the world's most popular chain of theme parks -- the perfect springboard to promote its latest entertainment offerings.
News Corp., Rupert Murdoch's media kingdom, owns the Fox network, the 20th Century Fox movie studio, and major publications like TV Guide, The Times, and the New York Post. Of the four stocks I've mentioned, this one has fallen the hardest in 2005. Yet the company has grown up in a hurry in the booming dot-com sector after its acquisitions of social networking hub MySpace.com and video-gaming enthusiast hangout IGN.
Time Warner, the once-celebrated marriage of new media and old, is also a complete media titan. More than 2 billion people around the world have access to Time Warner's CNN. It also owns HBO, America Online, New Line Cinema, and Warner Bros., of course.
OK, I get it, they're big media companies
Sure, you get it, but have you stumbled on the disconnect? Wall Street knows that these companies have enormous wingspans, but it's chosen to neglect their reach anyway. Is it because advertising dollars are migrating online? No, that couldn't be it; all four of these companies have massive online properties. Is it because media stocks are clunky dinosaurs? I'm not sure that's a valid argument as we head into the age of high-margin digital distribution.
The most logical explanation, even if it may spring from hindsight, would be that the market's apathy is a direct response to these four companies' freefalling financials. Oh, if only it were that simple. See, all four companies have grown their revenues and operating profits from continuing operations this year. They're now on firmer footing than they were last year -- or the year before that. Except that now, they're even more attractively priced.
If you're an investor -- and I have a sneaking suspicion that you just might be -- this is opportunity knocking. However, I'm not just asking you to notice these companies in their present underappreciated states. This is about connecting the dots to realize how the future will improve their fates.
Digital distribution is here. The market has talked up Apple Computer
Priming the digital pipeline
Amazon and Google are each working on initiatives to deliver the written word digitally. Whether it's actual downloads or value-added rentals, the end result is the same. Publishers are about to cash in on incremental revenue streams thanks to the margin-rich waters of digital distribution.
I never got around to the print empires of the four media giants, did I? Viacom owns Simon & Schuster. News Corp. has Harper Collins. Disney runs Hyperion Books. Time Warner happens to run a 155-magazine dynasty that accounted for $5.6 billion in revenues last year. Printing costs are a huge line item for these subsidiaries. You don't think they'll be happy to push more products digitally, without the hassle of inventory-stocking or returns?
As for video, these companies are rolling in it. Thanks to the recent rollout of the video-enabled iPod, purveyors of filmed entertainment stand to gain plenty as they dust off their catalogs for profit. It seems like a scattershot strategy at the moment. Disney is selling current ABC shows through Apple. CBS and NBC are selling on-demand episodes. AOL is providing some of its vault titles through its free, ad-supported In2TV streaming service. These digital distribution deals may sound insignificant at first, but does anyone remember when Apple sold its first million song downloads? It wasn't long before the company was pushing 500 million.
As the author of the monthly Early Adopter Roundup column in the Motley Fool Rule Breakers newsletter, I realize that it may seem odd for me to highlight four media behemoths as growth stocks of the future. However, spotting trends early -- even when they affect established companies -- can be a highly lucrative investing practice.
So, yes, tonight we will be adding two more selections to our list of active picks. That's not all you will find in the newsletter, though. We have dedicated columns uncovering the freshest investing ideas in biotechnology, early adopters, and nanotechnology. My column in tonight's issue is dedicated to fast-growing retailers looking to make their mark on the critical holiday shopping season. There is also a lively community board to keep the exchanges going above and beyond the regular distribution of new issues and mid-month updates.
Longtime Fool contributor Rick Munarriz can think of a few classic shows that he would love to download. He does own shares in Disney. Time Warner and Amazon.com are Motley Fool Stock Advisor picks. The Foolhas a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
