If you think the market’s been off to a hot start in 2013, look at how media stocks have been performing — and not just in the past few months.
Heck, Wednesday morning Comcast (NASDAQ:CMCSA) kicked off the day with a double-digit percentage jump as the company reported strong earnings and announced that it is buying the rest of NBCUniversal from General Electric (NYSE:GE).
That gain was just the cherry on top of what’s been a booming year for the entire sector. Take a look:
|Company||Ticker||1-year Return||YTD Return|
Keep in mind that the broader market climbed only 11% over the past year. Even the so-called laggards of the group are beating the S&P 500’s roaring start to 2013.
So, the follow-up question is obvious: Can media stocks keep this run up?
The Perfect Storm
Well, 2012 was in some ways the perfect storm for many media companies — especially Comcast. Election spending helped Comcast grow its cable advertising revenue by 19% in the fourth quarter and 14% in the full year. Plus, broadcast revenue for NBCUniversal — which made up around a third of the company’s total revenue last year — improved thanks in part to higher political advertising at the local level.
Other companies also got a boost from high levels of election spending. CBS (NYSE:CBS), which reports after the bell today, is expected to see a bump in both earnings and profits thanks to the election, while News Corp.‘s (NASDAQ:NWSA) TV division reported a 19% rise in operating income thanks in part to higher advertising revenue during the political season.
Plus, political programming itself can’t be overlooked. News Corp’s Fox News Channel has seen its rating slip of late but remains the leader in the space, while CNN’s coverage helped boost the channel’s ratings (although CEO Jeffrey Bewkes was still disappointed).
And Comcast got even more of a push from the Super Bowl and London Olympics — making for the broadcasting trifecta. The two huge sporting events were both aired on NBC and helped pump up the division’s numbers. Pro forma revenue from the broadcast television unit — NBC’s second-largest source of revenue — jumped 27% year-over-year, but only 5% excluding the Super Bowl and Olympics.
Which brings us to the biggest problem with the recent run in media stocks: It’ll be hard to keep up.
Slow Gains, But Not No Gains
Rights to the Super Bowl rotate every year between Fox, NBC and CBS, so that’s hardly a stable boost for any company. And while NBC shelled out $4.4 billion to maintain TV rights to the Olympics through 2020, Comcast won’t get any money back on that investment until 2014, when the Winter Games head to Russia.
And that not even diving into the other big-picture trend — the so-called cable-cutting revolution. Heck, even in a strong year, Comcast saw its total number of video customers slip by around 17,000.
Still, let’s not get overly cautious; no one’s saying a selloff is imminent. These stocks could keep heading higher … albeit at a much more “normal” pace.
Despite the past year’s eye-popping gains, media stocks aren’t overvalued based on historical numbers. Comcast and CBS are trading for around 15 times forward earnings, while News Corp. and Times Warner are even cheaper. The stocks simply started gaining back the whopping losses suffered around the time of the fiscal crisis and, just as they were reaching pre-recession levels, combined that momentum with the election and other big events to keep on heading higher.
Comcast Is Still Compelling
Back to Comcast specifically, though, it has one quality in its favor that sets it apart from the others: diversification. While most of the big names are media giants, they’ve been working to get specific — just look at News Corp. and Time Warner. Rupert Murdoch is splitting News Corp. into two divisions, a publishing arm and an entertainment company, to avoid letting the woes of the former hamper the gains of the latter. And Time Warner, after spinning off its cable business to Time Warner Cable (NYSE:TWC), is also looking to divest its Time magazine business.
Comcast, on the other hand, has its hand in countless different businesses — even more thanks to the NBCUniversal acquisition. The company now has control of NBC’s huge archive of popular TV shows and movies, along with its growing sports network and streaming service Hulu.
That’s an appealing combination, especially when you consider that Comcast first and foremost is a cable provider, the largest in the nation. But even if people cut the cord from cable, they will likely use Hulu or other streaming services, which requires the high-speed Internet offered by … Comcast.
Plus, the company’s broadband service is growing, which help to offset sliding video subscriptions and comes with better margins.
The bottom line? The easy money has probably been made for most of the media landscape. I don’t expect an outright decline from these levels, but the lofty gains of the past year are likely to normalize a bit. But there’s still plenty to like for Comcast — even without a “perfect storm” on the horizon, its dominance in the media business looks secure.
As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.