Television viewing habits are changing; the death of traditional broadcasters has long been predicted. But do the numbers back this up and, more importantly for investors, can the sector’s big names survive?
Pensioners watched around twice as much television as younger viewers according to Legal & General Investment Management (LGIM) between 2005 and 2011. But that has accelerated in recent years, with those aged 65 and older watching TV almost 3.5 times as much as the under 16s in 2016.
Furthermore, while over 45s are watching more TV than they would have 10 years ago, under 45s are watching less. In the case of ‘Generation Z’, we’ve seen what Madeleine King, researcher at LGIM, calls “an absolutely enormous change”.
That’s worrying for media companies. Extrapolating these figures alongside the expected ageing of the UK population, King estimates the number of minutes viewed on average will fall by a third over the next 20 years. “That’s not even taking into account any new technology, competition and any other threats that may emerge in that time period,” she continues.
Netflix Takes Market Share
Trends seen in the US with regards to Pay TV will also feed through to the UK, LGIM says. US consumers were happy to subscribe to Pay TV services alongside Netflix (NFLX) for seven years. But when Netflix’s penetration reached a third in 2014 and 2015, Pay TV net additions began to decline.
It’s taken around three years more in the UK, but video on demand reached that same critical mass of a third in 2017. As a result, we’ve just seen the first period since the advent of Sky in 1989 of a decline in pay TV households.
At the same time, the cost of production of quality TV programmes has risen. Reports suggest Netflix’s The Crown cost around £100 million. Compare that to the BBC’s Blue Planet, which cost £8 million. Collectively, Amazon (AMZN) and Netflix spent $2 billion globally on new TV content in 2017.
And Netflix is expected to continue burning cash for many more years to come. As a result, we’re now going through a period of consolidation in the industry, with Disney (DIS) set to acquire Fox’s film and TV operations; Fox in talks to buy the stake in Sky it doesn’t already own; and AT&T/Time Warner Viacom/CBS mergers on the cards.
King reckons this trend will continue, as scale becomes ever-more important. While King is still positive on the outlook for these traditional media stocks, Craig Bonthron, manager of the Kames Global Equity fund, takes the opposite view.
Bonthron likens consolidation in the sector to “re-arranging the deckchairs on the Titanic”. “Ultimately, these trends will continue. My children don’t watch TV anymore; they watch Netflix,” he says.
Media Companies Feel the Pinch
Share prices have come under pressure. ITV (ITV) is now more than 40% lower than its mid-2015 high of 282p; until news of Fox’s bid for Sky surfaced, the latter’s shares had fallen 20% in the same period. In the States, Viacom is also over 40% down since then. Netflix, meanwhile, has seen its share price increased by three-quarters since then.
While Bonthron has a negative view of the traditional media stocks, he is not a fan of Netflix. It’s still highly unprofitable and in the early phase of development. King says that while one might be inclined to think Netflix is an obvious winner, that’s not necessarily the case. A deal between Disney and Fox would make that the number one business in India, one of the largest markets in the world.
ITV: Cheap, or a Value Trap?
And what for ITV? Clearly there will be those who are negative on the stock, but many are also backing it to bounce back. Neil Woodford is a recent investor who has taken a stake in the channel.
Advertising revenue continues to be a worry for ITV. Carl Stock, manager of the Morningstar Bronze rated Rathbone Income Fund, notes that a deterioration in UK advertising is a key risk to ITV.
But Steve Davies, manager of the Jupiter UK Growth Fund, says some big brands are realising that the ability to hit a mass market through TV advertising still has an important role to play.
King and Bonthron both point to YouTube’s success with targeted adverts. Consumers are less likely to skip ads and more likely to engage with them if they are relevant. He wants TV channels to go down this route.
Another advantage ITV has is its content business. “That’s a huge strategic strength to them,” says Davies. The step-change in strategy previous bosses have implemented has helped ITV stay competitive despite a 5% reduction in ad revenues.
Ex-easyJet chief Carolyn McCall has taken the reigns this year and Davies sees plenty of room for her to evolve the company. Her previous media experience with the Guardian will also help.
While Netflix trades on a price/earnings ratio of over 200 times, ITV is extremely cheap, at around 10 times forward earnings, after its aforementioned de-rating. Both broker Investec and trading platform The Share Centre rate ITV a ‘buy’, with the former putting a price target of 220p on the stock, suggesting upside of a third.
Davies points out it is still churning out lots of cash, a fact that is not really recognised by the stock market. “I think underneath it is a much higher-quality business than the multiple suggests.” A yield of around 5% adds to the attraction.
“In an expensive market, ITV is a cheap stock,” says Stick. “However, the presence of disruptors, combined with a clear economic sensitivity, means that we must be alert to a further deterioration in earnings. If this happens, this value could become a trap.”
