Not Much to Watch on TV
Since the S&P 1500 index experienced a near-term top-out on May 9, only a handful of subindustry indexes have posted advances. One of them is the S&P 1500 Broadcasting & Cable TV index, which gained 1.3% while the S&P Composite 1500 Index fell 5.9% through June 9. This subindex consists of eight large, mid- and small-cap companies, two of which are ranked 4 STARS (buy) by S&P analysts: Radio One (ROIAK) and Univision (UVN). During 2005, this group gained 4.8%, vs. a 3.8% advance for the "1500."
As can be seen in the , the rolling 12-month relative price performance for this group continues to recover after falling beyond one standard deviation below its 15-year mean relative strength, and is now well above its nine-month moving average.
As a reminder, the jagged blue line represents the subindustry index's rolling 52-week price performance compared with the 52-week performance for the S&P 1500. Any point above 100 indicates market outperformance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the subindustry index's 15-year mean relative strength.
This industry, along with the advertising group, has shown surprising strength during this most recent market meltdown. Usually these industries -- both found in the consumer-discretionary sector -- would mirror the weakness seen in the overall market. The reason? Advertising spending, the primary economic driver, would likely be adversely affected by a forecasted slowdown in economic growth due to the prospects of higher interest rates as central bankers endeavor to keep ahead of inflationary trends.
This atypical strength therefore begs the question: What's going on -- and is it sustainable? Tuna Amobi, CFA, CPA, S&P's advertising and broadcasting analyst, has a neutral fundamental outlook on the broadcasting & cable TV subindustry. The outlook reflects S&P's view of a relatively slow advertising rebound and an elevated level of competition among providers of entertainment and communications services to consumers.
S&P's advertising outlook reflects concerns with continued audience fragmentation for traditional media operators, amid a shift to broadband and wireless platforms, as well as the portable-device segment. Amobi says S&P's tempered near-term view on ad sales also reflects a relatively soft TV "scatter" (i.e., spot-buying) market, a projected flat to modestly down upfront market, and continued softness in local radio advertising.
The battle of the bundles should intensify, says Amobi, as the Regional Bell Operating Companies (RBOCs) launch fiber-based video and broadband offerings. S&P thinks AT&T's (T) pending acquisition of BellSouth could lead to more aggressive price competition in "triple-play" or "quad-play" services.
Meanwhile, thanks to bundled discounts driven by new digital-phone service, several cable operators posted record first-quarter subscriber growth. These outfits are also looking to include a wireless phone service product in their bundles in 2006. The digital broadcast satellite (DBS) providers are also boosting their HD offerings, while still partnering with the RBOCs to better compete against cable.
Amobi sees an increased focus on strategic realignments such as splits, spinoffs, and IPOs, as well as other measures aimed to unlock strategic value and return capital to shareholders. With its recent announcement that its controlling shareholder made a nonbinding proposal to buy the company's outstanding shares, Emmis Communications (EMMS) has joined a growing list of companies opting for privatization. We also see a few potentially transforming deals on track to close in 2006, but expect more focus on partnerships and selective acquisitions aimed to capitalize on emerging digital platforms.
Among the key pending regulatory issues that could have major implications for the cable industry are those related to a franchising reform bill, as well as Net neutrality and a la carte programming. As for broadcast regulations, S&P views as paramount the issues surrounding a recently enacted DTV transition (set for February, 2009), possible FCC review of the stalemated media ownership rules, and continued scrutiny of media indecency.
So there you have it. Despite near-term relative strength, S&P believes the fundamental investment outlook for the S&P Broadcasting & Cable TV subindex is neutral over the coming 12 months.
Source: Standard & Poor's
Industry Momentum List Update
For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of June 9.