A Broadcasting Turnoff
The S&P 1500 Broadcasting & Cable TV subindustry index recently saw its Relative Strength Ranking decline one notch, from 3 to 2, indicating that its trailing 12-month price performance is now in the bottom 30% of all subindustry indexes in the S&P 1500 (a ranking of 1 would place it in the lowest 10%). Year-to-date through Apr. 18, the S&P Broadcasting & Cable TV Index rose 1%, compared with a 5.1% decline for the S&P 1500. During 2007, this subindustry index fell 23.7% compared with the broader market's climb of 3.6%.
There are eight large-, mid-, and small-cap companies in the S&P 1500 Broadcasting & Cable TV subindustry index covered analytically by S&P equity analysts. CBS (CBS) is ranked strong sell, while Comcast (CMCSA) is ranked sell. The remaining six stocks are ranked hold: Belo (BLC), Clear Channel Communications (CCU), DirecTV (DTV), Entercom Communications (ETM), Radio One (ROIAK), and E.W. Scripps (SSP).
Tuna Amobi, who follows the broadcasting group for S&P Equity Research, has a negative fundamental outlook on the broadcasting and cable TV subindustry. With an increased likelihood of an economic recession, he sees fundamentals continuing to be weak for terrestrial radio, and deteriorating for cable operators, as well as satellite TV providers, partly reflecting increased competition and continued audience fragmentation. He is also wary of regulatory uncertainties and potential disruptions from the recent writers' strike, against the positive backdrop of a relatively healthy TV advertising market and growing digital revenues for broadcasters.
The Battle of the Bundles
Amobi notes a sharp slowdown in revenue-generating units (RGU) growth for the cable industry, which has been evident in recent months. While several operators are still in the relatively early stages of deploying digital phone service, increased competition from satellite TV and telcos, combined with a sharp pullback in consumer spending, could result in further deceleration of RGU growth in 2008. With satellite TV rolling out advanced services (high-definition broadcasts and digital video recording), and the telcos recently showing early signs of traction with their continued launch of fiber-based video and broadband offerings, Amobi expects the battle of the bundles to heat up in the year ahead, potentially creating further pricing pressures.
Meanwhile, traditional broadcasters will probably remain challenged by secular factors such as audience fragmentation, as advertisers shift more spending to the Internet and other new media platforms, Amobi says. A terrestrial radio recovery could be impeded by a continued supply and demand imbalance, while the satellite radio companies have also seen anemic retail sales, even as they await a likely imminent regulatory decision on their pending merger proposal. However, TV advertising offers a bright spot, in our view, with a relatively strong 2007-08 upfront and scatter market for the networks, and a specter of record political dollars for local stations with the upcoming Presidential elections.
Key FCC regulatory issues that could affect the subindustry group include a revived ownership cap, a recent fast-track vote by the FCC to ease broadcast and newspaper cross-ownership rules, mandated digital multicasting obligations related to the digital TV transition, a ban on exclusive deals with apartment dwellings, and a ban on integrated cable set-top boxes, Amobi says. With the end of a recent buyout boom, he sees the shares reverting to fundamentals.
There you have it. The subindustry index's weakening relative strength and negative fundamental outlook indicate that this group should not be a near-term outperformer.
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), along with a stock that has the highest S&P STARS ranking (tie goes to the issue with the largest market value).
|Subindustry||Company||Ticker||S&P STARS Rank||Price (4/18/08)|
|Agricultural Products||Corn Products International||CPO||4||$41|
|Coal & Consumable Fuels||Peabody Energy||BTU||3||$67|
|Construction & Engineering||Fluor||FLR||4||$160|
|Construction & Farm Machinery||Manitowoc||MTW||5||$40|
|Diversified Metals & Mining||Freeport-McMoRan Copper||FCX||3||$114|
|Fertilizers & Agr. Chem.||Monsanto||MON||4||$129|
|Industrial Gases||Air Products||APD||3||$102|
|Integrated Oil & Gas||Exxon Mobil||XOM||5||$94|
|Oil & Gas Drilling||Noble Corp.||NE||5||$57|
|Oil & Gas Equip. & Svcs.||Baker Hughes||BHI||5||$81|
|Oil & Gas Expl. & Prod.||Swift Energy||SFY||5||$54|
Source: Standard & Poor's Equity Research