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Stop the news! Outlook improving for media stocks

Photo of Nick Radge, The Chartist By Nick Radge, The Chartist

min read

What the share price charts say about News, Fairfax, Nine and Seven West.

The trend of industry disruption has well and truly reached the media industry in Australia. Facebook and Google are leading the charge, not only through massive inroads in advertising but also in content delivery. Digital now has 40 per cent of advertising market share compared to zero per cent just 17 years ago.

Following a $232-million half-year loss and the subsequent loss of further bank loan guarantees from its shareholders, Ten Network entered voluntary administration earlier this year.

The Australian Government has stepped in with reforms. New regulations remove the “two out of three” rule that stopped companies from owning all three forms of media (newspaper, radio and television) in the same city, and the rule that prevented a single TV broadcaster reaching more than 75 per cent of the population.

Also, revenue-based licence fees will be replaced by a lower spectrum charge and an innovation package valued at $60.6 million over three years has been introduced.

The goal of government action is to bring the doctrine of the 1980s into the internet age so Australian media companies can rebuild and readjust accordingly.

Here is a technical analysis of four key media stocks.

1. News Corp (NWS)

News Corp was demerged from the former News Corp in July 2013, with the remaining assets repackaged under the 21st Century Fox brand. The new News Corp comprises the news publishing assets of The Wall Street Journal, Dow Jones Newswires and The Australian, book publisher HarperCollins, Fox Sports, a 50 per cent stake in Foxtel and a 61 per cent stake in online real estate business REA Group.

In recent months analysts have highlighted a couple of triggers that may see the stock re-rate. First is the strategic merger of the Foxtel and Fox Sports businesses. Second is the rapid growth of digital real estate portals, which is expected to continue even if the Australian property market cools.

At first glance, the technical picture for News Corp is somewhat mundane. Since it relisted in mid-2013 the share price has been stuck in a range from $16 to the occasional probe above $21. With a dividend yield of just 1 per cent, the argument for holding the stock has not been compelling.

However, on closer inspection, what does show on the charts is considerable buyer demand entering on any decline below $17. These three instances are characterised by quick probes lower with immediate upside reversals.

They are usually accompanied by large increases in volume. What this suggests is that the stock is well supported at those lower levels and as such, unless sentiment changes, we can assume that a solid level of support is in place and prices will bounce.

That said, the best outcome given the current level of data is that any bounce will simply take prices to the upper end of the range. If more active investors are willing to trade that range, then leaning against support makes sense. However, the price would really need a move through $22 to enforce the possibility of a sustained growth phase higher, and at this juncture that seems highly improbable.

NWS Chart

Source: Premium Data

2. Fairfax Media (FXJ)

Fairfax is best known for its two largest newspapers, The Age and The Sydney Morning Herald, although in more recent times it has moved down the acquisition path in Australia and New Zealand to diversify its business.

Fairfax is Australia’s leading digital publisher, reaching more than 11 million readers, and if a merger between New Zealand Stuff and NZME receives NZ High Court approval, it will become the largest media company in New Zealand, reaching more than two million customers.

Recent earnings were slightly ahead of analysts’ expectation but more importantly was the affirmation of the earnings outlook for the online Domain business, which has started FY18 with 16 per cent total revenue growth against guidance of 13 per cent.

The very long-term technical picture has not been pleasant for long-term shareholders, but since late 2012 the share price growth has been more positive, albeit quite volatile at times.

The chart below shows an upward sloping trend channel, which has provided solid support on five occasions since the low in 2012. That lower barrier has recently been tested and continues to hold, although any break below would increase the risk of the share price stalling in a broader range, similar to what News Corp has done.

However, if this upward grind continues, prices could attempt to probe the high resistance area about $1.80 in coming years.

FXJ Chart

Source: Premium Data

3. Nine Entertainment Company (NEC)

Nine Entertainment operates across four major divisions: free-to-air TV, digital publishing, video-on-demand and content productions. It has broader investments in Nine Events (which includes Ticketek), the lease on Allphones Arena in Sydney, a 50 per cent interest in Stan and a stake in Yellow Brick Road.

Seen as Australia’s most trusted media brand, being the number one broadcast network in the 25 to 54 demographic, its content covers news, lifestyle, entertainment and sport.

Its recent results were in line with analyst expectations. Nine Digital recorded EBITDA of $29 million, up 11 per cent and underpinned by long-form video growth, which as an industry grew by 37 per cent.

In television, audience ratings remained strong and, combined with a reduction in costs, is expected to lead to higher revenue through FY18 and FY19.

The technical picture shows a steady downtrend, which slashed the share price by 60 per cent through 2016. This pattern has now reversed and what appears to be a more stable uptrend has started taking shape.

Normally after a significant downward shift there is a period of base building from which a strong foundation is built, allowing a new trend to be established. However, that has not been the case here.

A V-shaped reversal tends to be created by a fast change in the underlying fundamentals or sentiment toward the company or industry. Continued strength to $1.90–$2.00 is expected.

NEC Chart

Source: Premium Data

4. Seven West Media (SWM)

Seven West Media holds an extensive portfolio of businesses covering the Seven group of free-to-air channels, Pacific Magazines, Yahoo7 and The West Australian newspaper. Its brand is synonymous with My Kitchen Rules, House Rules, Home and Away, Sunrise, and the covering of the AFL and Olympic Games.

The company continues to suffer from falling revenue share because of competitive peer programming, cost pressures specific to the AFL and tennis rights, and a weaker advertising market. While recent guidance was in line with analysts’ expectations, ongoing guidance appears to be optimistic in the face of metro TV market weakness.

The technical outlook is similar to that of Fairfax, but upside traction is yet to take hold. The share price chart shows a good example of the base building pattern that tends to follow longer-term downtrends.

This phase tends to be supported by insider buyers accumulating the stock over a period of time. Sellers tend to be those who have held through thick and thin, and eventually lose patience and reallocate their funds elsewhere.

These base building patterns can lead to extremely potent upswings when they finally do break higher. The risk, though, is that the basing pattern can remain in place for months or years, so it is always best to jump into the stock only when upside momentum has clearly taken hold.

SWM Chart

Source: Premium Data

About the author

Nick Radge is Head of Trading and Research at www.thechartist.com.au. His latest project is mentoring students in trading system design.

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