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Media Sector
INITIATION
Expect Sector to Trade In-Line with the Market
We are initiating coverage on the large-cap media sector at Market Weight.
With the media sector offering roughly market levels of growth and returns, the
stocks’ multiples are also in-line with the market by a variety of measures. We
believe the sector is likely to be most profitable to investors who can take
advantage of the occasional overreaction in share price, as most of the largecap
companies offer generally broad collections of medium-to-high quality
assets across all of the major categories of media. Based on current prices, we
rate News Corp. and Disney Outperform, and Time Warner and Viacom Neutral.
Please see our individual initiations for complete details.
From a fundamental standpoint, we believe that the ongoing transition in
media to a more targeted, on-demand, and digital distribution system will
create value. We see the companies with the broadest portfolio of content as
being disproportionate beneficiaries in this “long tail” environment in which the
controls around distribution are breaking down. We believe that with this, the
value between content and distribution is increasingly shifting toward content,
benefiting those companies skilled at creation over those more skilled at
marketing and distribution.
Currently, News Corp. is our favorite name in the space due to the quality of
its television and film assets, the potential for unrecognized value in its print
assets, and the company’s growing Internet business. We believe Disney is also
likely to continue to outperform given the strength in theme Parks, cable, and its
leverage to the growth in online advertising through its assets such as
ESPN.com, Disney.com, and ABC.com. With both names trading roughly in-line
with the group average, having relatively more attractive valuations and superior
assets, we believe they should outperform the group.
As for Time Warner and Viacom, we believe they are likely to trade in-line
with the broader market. While Time Warner may occasionally be buoyed by
talk of asset sales, we see these as unlikely in the near term and believe that
the company’s near-term prospects are reflected in the current valuation.
Despite Viacom’s recent weakness, we expect the challenges in the cable
businesses to weigh on the stock, as their core demographic increasingly goes
online for entertainment, while Viacom lags its competitors in exploiting this
opportunity.
Investment Summary
We are initiating coverage on the large-cap media sector with at Market Weight. With
the media sector offering roughly market levels of growth and returns, the stocks’ multiples
are also in-line with the market by a variety of measures. One of the more pronounced
measures that show this pattern is Credit Suisse HOLT™, Credit Suisse proprietary
valuation framework based on Cash Flow Return on Investment (CFROI™). As shown in
Exhibit 1, HOLT’s Economic P/E, which measures economic value paid for ROI, for the
media sector has followed the overall market within a narrow range over the past 20 years,
with the exception of the spike in 1999-2000 (Exhibit 55). The gap between the market and
the media sector has become tighter and the valuations have practically overlapped each
other since 2001. (Please see the Valuation section in this report for further detail on
various valuation measures reviewed.)
We believe the sector is likely to be most profitable to investors who can take
advantage of the occasional overreaction in share price, as most of the large-cap
companies offer generally broad collections of medium-to-high quality assets across all of
the major categories of media. Based on current prices, we rate News Corp. and Disney
Outperform, and Time Warner and Viacom Neutral. (Please see our individual initiations
for complete details.)
From a fundamental stand point, we believe that the ongoing transition in media to
a more targeted, on-demand, and digital distribution system will create value. We
see the companies with the broadest portfolio of content as being disproportionate
beneficiaries in this “long tail” environment in which the controls around distribution are
breaking down. We believe that the value between content and distribution is increasingly
shifting toward content, benefiting those companies skilled at creation over those more
skilled at marketing and distribution.
Advertising has been a major source of revenue for the media sector overall. Total
advertising expenditure spent on media in the U.S. added up to over $200 billion in 2006,
with the figure ranging from $210.0 billion (Veronis Suhler) to $281.6 billion (Universal
McCann). Almost a half of total advertising is spent on five mediums; newspapers,
broadcasting TV, cable TV, consumer magazines, and entertainment media, including film,
music, and videogames, in the order of highest to lowest share of advertising dollars.
These five mediums are also the main business segments of the media companies in our
coverage universe.
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