“The 2023 Taylor Swift tour exemplifies this pent-up demand,” says Morningstar equity analyst Neil Macker, referring to the mad rush for tickets in an entertainment industry revival that crashed Ticketmaster's system.
Despite inflation taking a bite out of household incomes, there appears to be some discretionary budget still being allocated to recreational pursuits including musical concerts and movies, among other forms of leisure activities.
The following companies are well positioned to benefit from the secular trend in the entertainment industry that is showing signs of resurgence off pandemic lows. Investors may want to keep these stocks on their screens as they trade at a juicy discount to their fair value, indicative of some upside potential.
The largest live entertainment firm in the world, Live Nation (LYV) has over 570 million fans across 44 countries using its concert and ticketing platforms, the most notable of which is Ticketmaster. The firm controls over 235 venues including the House of Blues, the Hollywood Palladium, and Spark Arena in New Zealand.
Live Nation, whose artist management agencies have over 400 clients, boasts a vast live entertainment footprint which helped the company “become one of the largest advertising and sponsorship platforms aimed at music fans,” says a Morningstar equity report.
The company’s on course to beat its pre-pandemic levels, evidenced by its highest attendance quarter ever posted recently. Festival attendance was up 40% versus the same quarter in 2019, which prompted management to forecast strong growth continuing in 2023.
“While 2020 was a challenging year, we expect that the reopening of venues in 2021 and pent-up demand for fans and artists will help the firm reach its 2019 revenue level by 2022,” says Macker, who recently updated the stock’s fair value to US$105, “reflecting an even faster rebound from the impact of the pandemic than we’d previously assumed.”
He forecasts average annual top-line growth of about 22% through 2026 with a more normalized annual growth of 8% for fiscal 2023-26.
“We expect that the firm will continue to use concerts as the ‘flywheel’ that drives the higher margin ticketing and sponsorship and advertising segments, along with onsite spending by fans,” he adds.
AMC Networks (AMCX) operates five domestic cable channels and a portfolio of international channels that reach over 350 million subscribers across 125 countries. The primary channel, AMC, ranks amongst the top 25 cable networks in the U.S.
Its stable of cable networks includes flagship AMC, WE tv, BBC America, IFC, and SundanceTV. AMC remains the most widely distributed channel, reaching over 78 million pay-TV households in the U.S.
“AMC Networks has transformed its flagship AMC channel from a minor cable channel showing classic movies into a premier prestige platform for original scripted content,” says a Morningstar equity report.
The transformation, it adds, provides the network with growth potential, contingent on AMC’s ability to source and cultivate strong original content and monetize programs internationally and on streaming platforms.
The firm has successfully monetized programs like Better Call Saul with third-party streaming platforms. However, “the launch of AMC+ may lower the price of future streaming rights if the rights are no longer exclusive,” cautions Macker, who recently lowered the stock’s fair value to US$30 from US$51, prompted by weaker third-quarter revenue.
The company has pivoted away from showing lower-rated movies to original content, a move “spurred on by the success of shows such as Mad Men and The Walking Dead,” notes Macker.
He cautions, though, that AMC operates in an “exceptionally competitive media market,” and relies on the relatively high level of advertising revenue that is exposed to the economy and economic cycles.
Nexstar (NXST) is the largest television station owner/operator in the U.S., with 199 stations in 116 markets. Of its 199 full-power stations, 155 are affiliated with the four national broadcasters: CBS (49), Fox (42), NBC (35), and ABC (29). Nexstar has networks in 12 of the top 20 television markets and reaches over 68% of U.S. TV households.
The entertainment company also owns NewsNation (formerly WGN), a nationwide pay-television network, and a 31% stake in Food Network and Cooking Channel.
“The large scale of the firm, along with increased political ad spending, has increased the importance of elections,” says a Morningstar equity report, stressing that the firm “will continue to benefit from political ad spending growth,” which could help offset weaker local and national ad growth.
The report projects political revenue will continue to grow while core ad revenue could slide on an organic basis as digital continues to squeeze out analog platforms.
“Some of this loss will be mitigated by Nexstar’s digital efforts that focus on local advertisers,” assures Macker, pointing out that over 70% of non-political advertising revenue is generated at the local level by selling ad time to area businesses, including restaurants, auto dealerships, and retailers.
The company recently delivered a solid third quarter where net revenue jumped to US$1.27 billion, or 9.7% from the prior year’s quarter, led by strong growth in political advertising and digital revenue.
Macker puts the stock’s fair value at US$195, implying 2022 adjusted price/earnings of 9 times, and a free cash flow yield of 15%.
