Media Stocks Best Proving Malone Wrong: Riskless Return

Entertainment companies are proving a safer bet than Liberty Media Corp. Chairman John Malone forecast four years ago, when he predicted some would follow the decline of music labels and newspapers amid online competition.

U.S. media stocks, instead of faltering, produced the best risk-adjusted return since the end of 2011 of the 24 industries in the Standard & Poor’s 500 Index, according to the BLOOMBERG RISKLESS RETURN RANKING. The stocks tied with pharmaceuticals for the biggest improvement from the prior three years, as concern faded that customers would cancel their pay television subscriptions in favor of online services.

Media shares plunged in 2007 and 2008 as advertising cratered and investors fretted that movie studios and cable-television providers would follow the path of music labels and newspaper chains, losing steady customers and advertisers to free or lower-cost content on the Web. Since then, investors have reassessed the prospects for Comcast Corp., Time Warner Inc., News Corp. and their competitors as sales and profits climb with content providers striking additional digital distribution partnerships.

“The stability in the cable industry really came to light through the economic downturn,” said Thomas Lieu, a portfolio manager at Dallas-based Westwood Holdings Group Inc., which owns about 3 million Comcast shares. Revenues and earnings have accelerated in recent years, he said, while “valuation still lags given how solid their performance was and continues to be.”

‘Too Late’

The S&P 500 media index, made up of 15 stocks, rose 60 percent from the end of 2011 through the first quarter, topping all groups. Its price swings were below average, leading to a risk-adjusted return of 4.1 percent, according to data compiled by Bloomberg. Pharmaceuticals, including biotechnology and life sciences, had the No. 2 risk-adjusted return, at 3.7 percent. Both industries improved by 2.3 percentage points from the 2008-2011 period.

Bloomberg’s risk-adjusted returns are calculated by dividing the total return by volatility, or the degree of daily price variation. Higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for loss. The figures aren’t annualized.

Sentiment toward entertainment stocks has brightened since July 2009, when Malone told reporters at Allen & Co.’s annual media industry retreat in Sun Valley, Idaho, “it may be too late” for some companies to survive. “The Internet is moving too fast, too far,” he said.

New Streams

Malone said media companies would suffer if they couldn’t prevent users from gaining access to their content for free.

Cable, satellite and telecommunications companies added a net 31,000 pay TV customers last year as new accounts outnumbered cancellations, according to an April report from Toronto-based Convergence Consulting Group Ltd. Comcast said it would have added video customers last quarter if not for Hurricane Sandy. Internet services including Hulu Plus, Netflix and Amazon Prime pay media companies for content, acting as complements to live TV and providing additional revenue streams.

Since song sharing site Napster emerged in 1999, music industry sales have fallen by more than half to $7.1 billion in 2012, according to the Recording Industry Association of America in Washington. Advertising revenue at U.S. newspapers dropped at a similar rate to $23.9 billion as of 2011, according to the Newspaper Association of America in Arlington, Virginia, whose figures include online sales.

‘Convenient’ Shopping

Cable TV industry revenue more than doubled since 1999 to $97.6 billion in 2011, based on the latest data from the National Cable Television Association in Washington. The average U.S. pay TV bill rose 6 percent that year to $86 a month and will reach $123 by 2015 as companies offering a “convenient, one-stop shop” maintain pricing power, according to market researcher NPD Group Inc. in Port Washington, New York.

Comcast, the Philadelphia-based owner of NBC Universal and the nation’s largest cable system, had the highest and most improved risk-adjusted return within the media index. The shares gained 81 percent since Dec. 31, 2011, with 19 percent volatility, for a risk-adjusted return of 4.3 percent.

Investors sought safety in the company’s consistent earnings and growing broadband business, said Chris Marangi, a portfolio manager at Gamco Investors Inc., a Rye, New York-based firm managing $36 billion in assets including holdings in Comcast, DirecTV and News Corp. Comcast added 341,000 high-speed Internet and 168,000 telephone customers in the fourth quarter, while losing 7,000 video subscribers, the company reported in its latest earnings release.

‘Both Pots’

The company raised its bet on cable programming by purchasing the remaining 49 percent of NBC Universal from General Electric Co. in a deal completed last month.

“Comcast has its hand in both pots -- content and distribution,” Lieu said.

Cablevision Systems Corp., the Bethpage, New York-based cable TV operator, posted the worst risk-adjusted return over the past 15 months, at 0.3 percent, with the smallest price gain and the widest swings. The company spun off its TV networks Madison Square Garden Co. in 2010 and AMC Entertainment in 2011, making it less exposed to improving sentiment about TV networks.

Malone’s Liberty Interactive Corp., which isn’t part of the media index, gained 49 percent and returned a risk-adjusted 2.4 percent since 2011.

Getting Paid

Content creators such as Walt Disney Co. and Time Warner have taken measures since 2010 to ensure they get paid for their programming by requiring that visitors to their websites prove they are pay TV subscribers before they can watch most of their shows. New York-based Time Warner has had the third-best risk-adjusted return since 2011 among major media stocks, and Burbank, California-based Disney ranks fifth.

Movie studios this year are likely to fall 3 percent short of the record 2012 domestic box office sales paced by “Marvel’s The Avengers” and “The Dark Knight Rises,” according to analysts at Barclays Plc.

Even so, international ticket sales have been growing, and film and TV studios are combating declining sales of DVDs by reaching agreements with new video streaming services. Disney signed a deal in December to provide its films to Netflix Inc. for exclusive streaming starting in 2016.

‘Right Price’

“They stepped up and paid the right price,” Disney Chairman and Chief Executive Officer Robert Iger told analysts on a Feb. 5 conference call.

Industrywide revenue from subscription-based streaming services climbed 46 percent last year to $2.3 billion, and digital purchases of movies and TV shows rose 35 percent to $800 million, according to research from Nomura Securities International Inc. That allowed home entertainment revenue at the major studios to hold steady at $18 billion, even as DVD sales and rentals fell.

“Given the past rate of industry declines, this is still a relief for the industry that maybe we have finally turned the corner and should help further improve profitability,” Nomura analysts led by Michael Nathanson said in a March 25 report.