Don't change the channel on media stocks

In spite of structural changes and shifting user habits, traditional media companies have given investors decent returns, with TV and radio ad spend remaining buoyant.

2013 has been a relatively kind year for media stocks.

As of last week, the ASX200 was up 14.98 per cent for the year to date. If you took a position in six of the main listed media vehicles, your return for the year would have been an impressive 36 per cent.

Allow me to explain. If you invested $50,000 on January 1 – $10,000 in each of Ten Network Holdings, Seven West Media, Fairfax Media and Southern Cross Austereo; and $5000 in each of Macquarie Radio Network and APN News and Media – as of last week these holdings would be worth $68,250. And this excludes dividends: Seven West Media, Southern Cross Austereo, MRN and Fairfax Media have all paid dividends since the start of the year.

Not bad for a segment staring down unprecedented structural change and shifting user habits. Of the six companies listed above, only Ten hasn’t seen growth, starting the year around the 28 cent to 29 cent mark and remaining in the same position at the end of November.

The result is striking considering all six are predominantly traditional media-led companies. All have digital components, but they rely heavily on one channel for a large chunk of their revenue. Seven and Ten are highly reliant on their TV revenues, Fairfax and APN its newspapers, Southern Cross Austereo and MRN on radio assets.

TV has shown remarkable resilience over the past decade in terms of its attractiveness to advertisers. Despite many claiming that the idea of watching television was an old one, television audiences have remained stable. Advertisers continue to spend money on the channel, fuelling modest growth – but growth nonetheless. Radio, like TV, has also endured, despite the entrance of on-demand music products across computers, tablets and mobile. Radio ad spend continues to rise.

Print is another story. Newspapers and magazines are experiencing consistent double-digit advertising declines, declines that appear remarkably out of sync with readership and circulation movement. Optimists claim that newspapers’ revenue declines are beginning to ‘level out’, but the insatiable growth appetite of digital media and the importance of digital to the profit and loss of media and ad agencies continues to create problems for the print channel.

The companies most heavily reliant on print are showing positive signs. Fairfax appears to be building its digital assets, is seeing positive momentum with its Domain brand, and is looking at content marketing and events as channels to leverage its content heritage and credibility, as well as its audience footprint. APN is doubling down on its FM radio assets and small format outdoor provider Adshel, while launching the iHeartRadio brand into Australia in partnership with ARN co-owner Clear Channel.

If you told me that the share prices of Southern Cross Austereo, MRN and APN would increase in value more than a digitally led business like Carsales in 2013, I would have said you were crazy. But that is what has happened: Carsales’ year-to-date is up 28 per cent; Southern Cross Austereo is up over 50 per cent, MRN 90 per cent and APN up 78 per cent.

But the big winner in the media stock battle so far is REA Group, up 123 per cent this year and trading at a hefty 48x price-earnings ratio. Its market cap has zoomed past $5 billion, which values it $560 million short of the combined values of Ten Network, Fairfax, ARN, MRN, Southern Cross Austereo and Seven West Media.