Why media shares were winners in 2016
The shocking consumer inflation and retail data has sealed the fate of King Dollar. As I wrote last week, King Dollar has claws, thanks to at least three rate hikes in 2017. This is the reason Citigroup and US money centre banks are flying. Citi was 45 when I recommended it in October and is now 61. My Santa Claus was King Donald the Dragon (okay, Dodd Frank) Slayer. The KKR, Blackstone, European bank (ING, Barclays) trades were all big winners. Janet Yellen has reached the limits of the Fed’s dual mandate. Interest rates will begin to rise in June and continue rising until 2018.
I had outlined my strategic ideas on Walt Disney, Twitter and Viacom in the past year. Time to take a retrospective look at my media picks. Walt Disney shares have risen 20 per cent since I recommended the Magic Kingdom as a core media holding last summer. Despite cord cutting at ESPN, Disney still beat 4Q 2016 Street EPS “whisper number” of 1.49 and chairman/CEO Bob Iger (husband of my old Penn classmate Willow Bay!) hinted he would not retire in 2018. Is it time to book profits on the House of Mouse? No, though new money should wait for a correction to 102-104 to jump aboard the Disney choo-choo train.
Disney’s theme parks are on a roll and the new Shanghai Park is a runaway success, the reason the division contributed $1.1 billion to the bottom line despite the hit due to Hurricane Matthew, the Hong Kong protests and the French terror attacks. Avatar Land is the next sizzler in Orlando. The Hollywood studio scored a hit with the Star Wars franchise. The Force Awakens and 207 will see another Beauty and the Beast, Guardians of the Galaxy and Pirates
of the Caribbean. Disney is a multi-generational franchise. Is ESPN a party poopah for Disney? Sure. Lower subs, higher programming costs, flat to soft ad rates. Yet skinny cable subscriber growth and college football viewer growth will offset some ESPN pain. Disney is not expensive at 16 times forward earnings. My buy/sell range on Walt Disney is 104-120.
I had shorted Twitter at 36 sometime in summer 2015 written up the trade idea and my strategy rationale in this column and but covered it three points lower as I was terrified about a takeover bid with a juicy premium that could decimate the trade. Now Twitter has sunk to 16.62 and even Steve Ballmer is publicly calling on Jack Dors- ey to call it quits at Square. While Trump has unquestionably turned Twitter into a global culture/media icon, its financial metrics are awful.
The shares were skinned alive on Wall Street, down 12 per cent after the revenue beat and Cowen, a TMT investment bank I know well from spending time in its offices on Rockefeller Plaza during the 1999 go go era, even downgraded Twitter to a sell with a price target of $12. This may well happen as the new guidance implies 40 per cent lower ad revenues. Facebook and Instagram are killing Twitter’s digital advertising franchise, period. The shares are expensive at 19 times enterprise value to Ebitda. Any media CEO would be crazy to bid for Twitter at a time when its valuation is shrinking as it fails to monetise its business model. So Cowen is right. This puppy is a short now with a $12 target.
The hottest thing in media investing in 2017 is Viacom’s makeover. I had recommended the shares in the mid 30’s last summer in this column but the catalyst for its 20 per cent rise in January/February 2017 was new CEO Bob Bakish’s strategic turnaround plan. Bakish plans to focus on six cable brands with the most growth potential — Nickelodeon, Comedy Central, Nick Jr, MTV and Spike. This is mission-critical in an age of skinny cable packages though MTV has been a rating disaster. Bakish also plans to raise eight to 12 per cent margins at Paramount Pictures. Bakish is the quintessential Viacom insider and ran the company’s international business. Friends tell me the new CEO enjoys Shari Redstone’s confidence and it is symbolic that Shari has moved into her legendary father’s office in Manhattan. The biggest black hole at Viacom is its Hollywood studio Paramount Pictures, whose movies are so lousy that its US box office was $877 million, one fourth Disney’s revenue run rate. Viacom secured a $1 billion investment from the Shanghai Film Studio, a key to the box office paydirt in the Middle Kingdom. This could mean Paramount finally produces 10 to 12 movies. The secret in Viacom lies in Hollywood and Wall Street egos — stay tuned!