Media Investments

The Wall St. Journal has an interesting article today discussing the net losses of cable subscribers in the third quarter. Specifically, the article noted:

"WITH ABOUT 70% OF PAY-TV CUSTOMERS ACCOUNTED FOR, THE INDUSTRY HAS LOST ONLY ABOUT 67,000 SUBSCRIBERS ON A NET BASIS. THAT COMPARES WITH A NET LOSS OF NEARLY 400,000 FOR THOSE SAME COMPANIES AND ROUGHLY 566,000 FOR THE INDUSTRY IN THE SECOND QUARTER, ACCORDING TO MOFFETTNATHANSON."

The net loss of cable subscribers has been watched extremely closely since early August when Disney reported larger than expected subscriber losses for ESPN. ESPN is considered the gold standard of cable and therefore any losses there would be expected to carry over to other cable content.  

After ESPN reported their results in August, panic set in and any stocks related to media took a 20%-30% haircut, if not more. Prior to the "route" we owned EW Scripps (SSP) which is a broadcaster for networks such as ABC, NBC, etc. Broadcasters make money by selling advertising on their channels and by selling their channels to cable networks. Just as Comcast or Time Warner (the cable providers) have to pay ESPN to have their channel, the cable providers pay the broadcasters to carry ABC, NBC, etc. The broadcasters turn around and pay some of that back to the companies that own ABC, NBC, etc. but net net they make a lot of money with this arrangement. 

After the route we rotated from owning just SSP to owning Media General (MEG), Tegna (TGNA), Scripps Broadcasting (SBGI) and EW Scripps (SSP).  The basic idea was that each of these businesses was materially mispriced after the route, and rather than owning just one (SSP) a bucket would provide a better risk/reward. 

The Journal article followed up with:

"Still, the slower subscriber decline suggests it may have been premature to mark the second quarter as a cord-cutting inflection point. The launches of new streaming services such as Sling and HBO Now may have exacerbated those falls. And the third quarter’s pay-TV data should offer a buffer, if not a boost, for media companies’ shares as they report earnings this week.

Indeed, while it is too soon to say cord-cutting fears are overblown, the latest figures may show the danger of too quickly buying into a new narrative based on limited information. Many investors had already begun to realize the summer rout was an overreaction. Shares of the five largest media companies—Disney, Time Warner21st Century Fox,CBS and Viacom—have climbed by an average of 13% over the past month."

These comments focus mainly on the content providers while we own the broadcasters but the overall theme resonates in that the market is prone to shooting first and asking questions later. The key to investing of course is the patience to wait for this to occur. We currently own two of the four broadcasters noted above, (i) SBGI and (ii) TGNA. MEG received an acquisition offer after making one of their own and SSP re-rated to a price we deemed roughly fair value. While the broadcasters are not as cheap as they were in mid-August we still believe there is good value supported by strong cash flows.