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Industry Analysis: Entertainment
The Value Line Entertainment Industry is comprised of a set of diversified companies. They are mainly television network and station owners, and are typically involved in programming and production of content, including feature films. It is a constantly evolving group, with prospects in certain subsectors being much better than in others. Revenue trends in certain core segments, including broadcast television and radio, tend to vary with consumers' and advertisers' preferences towards new forms of media. Several conglomerates control a large proportion of the industry, somewhat limiting competitive pressures.
The trend in advertising spending is an important factor affecting this group. Indeed, a large proportion of this industry's top line is derived from ad expenditures, on both the national and regional levels. Strong demand in the upfront (advance) market occurs during an economic upturn, indicating bright prospects. Auto manufacturers are the largest advertisers, while retailers and financial services companies also play a large role. However, when these firms slash spending, it hampers the earnings of entertainment companies heavily reliant on advertising. Meanwhile, a television station owner's ad income tends to fluctuate in tandem with viewership ratings. In addition, ad pricing can be affected by various metrics. Examples would be the level of airtime inventory, occurrences of local and general elections, and the Olympics. Finally, other forms of revenue may consist of affiliate fees from cable television providers, the sale of syndication program rights, film box office receipts, as well as sales of physical media (such as DVDs) and downloadable content.
A flourishing economy will help broadcasters by way of higher corporate ad demand and more personal spending. During a slow economy, corporations are likely to cut their advertising spending. However, entertainment companies can often mitigate the effect through initiatives such as higher affiliate fees, which work to support the top line. Reviewing a company's earnings history should be indicative of how well it has navigated economic slumps.
Technological advances also play a role in the industry. Products, such as namely digital media and high-definition (HD) content, have widened consumer choice, which tends to spur competition. On point, subscriber acquisition costs, consisting of programming, production, distribution and marketing expenses, are likely to increase.
When evaluating a media firm, consideration should be given to the businesses in which it operates and the proportion of revenues accorded to each endeavor. For instance, cable television and outdoor advertising (billboards) may be seen as having better prospects than radio. Companies with larger, more diverse holdings are often capable of realizing revenue and cost synergies that mitigate some risk. In addition, operating margin improvement is usually driven by cross-platform tie-ins of popular brands through various outlets, such as consumer products (namely toys) that market popular films.
Buyouts and divestitures are common among industry participants seeking to achieve the ideal structure. Popular areas for purchases can include, but are not limited to, video gaming, digital, and online properties. The deals may not be immediately beneficial to the bottom line, though, because of increased R&D and content development expenses. In the meantime, divestiture of traditional radio properties is a common thread in the industry. Finally, regulations, including those pertaining to restrictions on the ownership of multiple television stations in one market, impact the composition of the industry and foster competition.
Investments in Growth
Consumer preferences often change, and successful media companies periodically review their portfolios, while taking action to improve their product mix. The creation of quality content is becoming increasingly important, as is international expansion. Large conglomerates with strong balance sheets, access to cheap capital, and strong distribution capabilities are best positioned for overseas ventures. Smaller companies, operating in one or two subsectors, may be ill-equipped to invest in operations that will boost their profit growth potential. Meanwhile, the growth of emerging markets is a positive for the industry. Indeed, many companies have taken a foothold in these markets, and continued expansion in this regard is likely.
A healthy financial position is vital in determining the ability of a media firm to make the right investments. A moderate amount of leverage is seen as being favorable, since borrowings are often required for investments in small acquisitions or new projects. Restraints on available credit might hinder a firm's ability to enter new sectors. Cash flow is an important metric, and should be evaluated to determine if a firm can easily fund its expansion initiatives, as well as pay down debt and repurchase shares.
The Entertainment Industry can change rapidly. Thus, the ability to identify desirable content, foresee trends, capitilize on expansion opportunities requires a good deal of managerial skill. A focus on growth markets, such as online content, generally adds to a company's long-term appeal. By the same token, investors should be wary of those with large holdings in declining sectors. Additional investment attributes include a healthy return on capital and solid cash flows. And, from time to time, some companies may be viewed as attractive in light of near-term catalysts, such as well-received movies. Finally, some entertainment equities, primarily those of broadcast television station owners, often offer attractive dividend yields. Large-cap stocks with high marks for Price Stability can also be found in this industry.