Last week, we wrote that advertisers were worried about two things: 1) A second wave of COVID and 2) Back to School – and perhaps those two are related as schools appear likely to start the year with relaxed dress codes. Back to COVID – with some markets seeing an increase in cases, advertisers appear to be re-thinking budgets and the market may be slowing somewhat. We continue to expect a saucer shaped recovery.
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I'm excited to be adding the Live Entertainment vertical to our Media and Distribution coverage with the addition of MSG Entertainment (OP) and MSG Sports (OP). As the economy slowly begins to re-open, we view MSGE and MSGS as disproportionate beneficiaries. I am also completing the hat-trick of picking up MSG Networks (UP) under our Local vertical.
Initiate with Underperform rating & $8 FYE’21 PT. While we think MSGN has some of the most sought-after sports content in the NYC market, the RSN business model has come under significant pressure due to accelerating pay-TV sub losses, its high price tag, and growing fixed cost base. With the backdrop of these secular headwinds, we expect further pressure on the stock.
SSP is reportedly exploring a sale of Stitcher, its podcasting production and advertising services business. This news was reported by The Information and comes on the heels of Spotify’s big spending spree the past 12 months, with the Joe Rogan exclusive licensing deal ($100MM+) and acquisition of The Ringer (~$200MM). According to the trade, SSP is in the early innings of the process and is expected to inquire interest from the top audio players, Spotify and Sirius XM, along with others in the space. We think AMZN could also be a potential buyer given its publicly stated interest in podcasting.
The market has been playing the cyclical long trade in the media sector for the past several weeks on the sequential improvement / re-opening theme, with incremental bullishness into last week’s industry conference. The sell-off in the group this past week on a positive outlook was symptomatic of a sell the news event. However, our thesis for 3Q remains unchanged – ~500-1,000bps of sequential improvement for national adv., with local more market specific, but potentially better (for non-sports nets) if the NFL, NCAAF, etc. end up getting cancelled. Advertisers remain nervous about two things: 1) A second wave of COVID, and 2) back to school spending.
Some small late-2Q money continues to get spent heading into 3Q. Also, scatter pricing is flat-to-up slightly for 3Q vs. the upfront in many cases, though volume remains subdued. Upfront conversations have picked up and CPMs still appear as though they will be up, though buyers continue to push for flat-to-down. Concerns of a second wave of COVID this fall means that advertisers would like more flexibility to cancel rather than defer. As we head into the summer, it won’t be long before we start talking about back-to-school spending, which at this point, is a big unknown. Our 3Q expectation of ~500-1,000 bps of seq. improvement for cable/TV nets remains unchanged.
While discussions seem to flip-flop every day between a broader re-opening of the economy vs. a “re-closing”, we’ve been asked which stocks are most exposed to economically sensitive industries. Overall, Local is most exposed, followed by Div. Entertainment (see p. 2 for a revenue breakdown). Within Local, all outdoor and radio names have virtually 100% exposure thru advertising, while SSP, GTN & NXST are most exposed in broadcast. In Diversified Entertainment, DIS, DISCA, FOXA and VIAC have significant exposure to either a re-opening or re-closing.
Last week we wrote that phones were ringing at the networks and that 3Q20 inquiries have picked up / budgets have been registered. We believe that trend has continued, with the last couple of weeks of June seeing an increase in demand as well. The takeaway is that 2Q may end slightly better than we expected a couple of weeks ago. That said, our 3Q expectation of ~500-1,000 bps of sequential improvement for cable/TV nets is unchanged. It also appears as though auto dollars are starting to surface for 3Q, though it is too soon to call the impact on the market.
With the NBA, NHL, and EPL poised for a return to finish the season (and PGA starting up soon), the market will increasingly look to companies with sports exposure. We expect some of the budgets that were earmarked for the Summer Olympics to be allocated to the upcoming games, with more clarity on the NFL and NCAAF in a couple of weeks. With ~40% of advertising from sports programming, we think FOX is best positioned to benefit.
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