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Stop press! Outlook for new media stocks

Photo of Richard Hemming By Richard Hemming

min read

New media stocks benefitting as more information goes online.

New media, old media, what does it matter any more? Investors care about making money, not about what’s new and what’s old.

Back in 2013, APN News, was heavily indebted and trading on a Price Earnings (PE) multiple of 3.5 times, which indicated that most didn’t think it would survive. Enter the eponymous radio duo Kyle & Jackie O, who came to the rescue.

The duo’s contract with the Australian Radio Network is rumoured to be worth $1 million a year, which was thought to be exorbitant. If you look at their contributions to the earnings of the parent company, APN News, shareholders now think they were a bargain.

This is overstating the case, but it makes the point that there is money to be made in both new and old media.

Subsequent to our recommendation on APN, its new management raised money selling businesses in New Zealand newspapers and outdoor media as well as some of its radio assets. This enabled the market to have a clearer view of what the assets were worth.

Why media has made money for many

It is a fact that in times gone by traditional media giants such as Newscorp, Comcast, and even Channel 9 have made investors lots of money. The latter for everybody, except Alan Bond and some US hedge funds.

These days you only have to look at Google and Facebook to see the riches available, although their giant size obscures the fact that in order to make money, it’s about investing at the right price.

There is potential because the media sector overall can grow at twice the rate of the underlying economy. The more developed the economy, the more incremental dollars go into media; because products need marketing and marketing needs media.

Because of the high proportion of fixed costs, media companies have more operating leverage than most. Our rule of thumb is that if revenues grow 10 per cent, earnings will grow at 20 per cent. Of course, the reverse is also true.

Finding a good small cap in the Media

Being in the Small Cap space, we look for niches in the space that you might not have heard of, like InfoMedia, which is one of the leading publishers of car parts and prices, servicing dealer networks around the world. We also look for companies like APN News & Media, which are asset rich, but whose stock had fallen to levels where the market was anticipating that it would go out of business.

The state of play in the fast changing world of Media

Before I outline some of the small caps we look at, it’s worth covering off on the state of play in media. First up, there is so-called “traditional or old: media, which could be termed as print, TV, outdoor, radio, and advertising agencies.

Print

The most dramatic action is occurring in print, whose business model is almost bust. Print has now become a mechanism to advertise predominantly real estate. Fairfax’s Domain website is arguably worth more than the rest of the company, and in a similar vein, Newscorp’s stake in realestate.com.au owner REA is worth more than Newscorp, once you take away its cash and its investments.

Broadcast

The results so far show that TV’s business model is also coming under intense pressure. The only commercial broadcaster making good returns is Network Ten, arguably because it isn’t paying big money for sport.

Media Management is under real scrutiny as their markets decline and it is interesting to see which ones are sinking and which ones are swimming. Cost management is critical in this environment.

One key to television surviving is the cost of sport. If the Optus purchase of the Premier League broadcast rights for Australia comes off, and isn’t a disaster in technology, Free to Air TV will not be able to pay up for the rights to major sporting events because they will be outcompeted by the likes of telecommunications and technology companies with superior business models, i.e. bigger profit margins. The experiment has begun in the past month and so far the jury is well and truly out.

The other risk confronting sport is that customers go direct to source. The NFL’s “game pass” subscriptions went through the roof in Australia on the back of Jarryd Hayne’s success at the San Francisco 49ers.

Radio

Speaking of cost control, it is becoming clear that some of the best managers in the media sector are in radio. These companies have managed down their costs well, but are vulnerable to the highly paid talent such as Kyle & Jackie O. This medium has a captive market, selling to people in cars, and that’s hard to see changing.

Outdoor & a niche player

Speaking of captive markets, billboard advertising has been a big beneficiary of new digital technology, which has seen a number of successful listings in the sector. These are companies that have often come from being listed and sold to private equity and then re-listed again. It’s a merry go-round, but one which has worked this time for Ooh Media, APN Outdoor and QMS Media.

Outside of these big areas there is a company called iSentia, which is in media monitoring. If you’re a big company, you might pay iSentia to pick up any articles that have been written about you, so that your public relations team can respond, or not.

Media has gone global

Another point needs to be made when we talk about all types of media, and that is, that it is increasingly global. We all consume global media, whether it’s AppleTV, Netflix, the NY Times or even the Guardian. On the social media side, it’s Twitter and Facebook. People that use social media services are looking to potentially converse with people on the other side of the world. Google is now a part of the global lexicon.

Are there investment opportunities in the media?

Because there is such big leverage in the sector, inevitably, as an investor, you either get things really right, or you get taken to the proverbial cleaners.

Another factor is that when there is momentous change, the market tends to misprice assets. It is rare to find one company that exists in only one area. As discussed earlier, APN News was a good example of company disaggregating itself, selling of its newspapers and boosting its presence in radio.

Other companies whose valuations are clouded by a big asset base include News Corp, Fairfax Media and Southern Cross Media. Nine Entertainment looks cheap in our opinion, and there will be more deals done as weaker management get the flick and companies in declining sectors build scale.

Under the Radar has waded back into media recently with a tip on the APN News spin-off of its New Zealand assets in NZME. Its key assets are in publishing and media. This stock is up almost 20% in under six weeks. We also favoured the radio group Macquarie Media (MRN), which has returned 40% in just over three months.

Who says old media is dead?

About the author

Richard Hemming is editor of http://www.undertheradarreport.com.au/

Visit the website to find out more about the big growth opportunities in the world of small caps and get a 30-day free trial with Under the Radar Report.

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