The media and entertainment industry continues to evolve thanks to technological progress and behavioral changes caused by the pandemic. The pandemic-led remote lifestyles boosted demand for streaming services, gaming, and user-generated content.
According to PwC’s Global Entertainment & Media Outlook, following a pandemic-related 2.3% fall in 2020, Entertainment & Media revenue increased strongly by 10.4% in 2021 to $2.34 trillion. As the industry is becoming more digital, mobile, and youth-focused, virtual reality (VR) and gaming should significantly drive its growth.
The entertainment market in the United States is projected to reach $7.44 billion in 2022 and $10.01 billion in 2026, growing at a CAGR of 7.7%.
However, discretionary expenditure is expected to decline amid increasing interest rates and other macroeconomic headwinds. Many consumers are cutting back on their entertainment expenses. As a result of slowing demand, fundamentally weak entertainment companies are struggling to stay afloat.
CJ Bangah, principal for tech, media, and telecom customer transformation consulting at PwC, said, “With rising interest rates, media companies are going to need to make hard choices about what they prioritize, where they invest — and where they find cost savings.”
Given the industry’s solid long-term growth prospects, quality entertainment stocks TEGNA (TGNA) and Lee Enterprises (LEE) could be solid buys now. However, given Warner Bros. Discovery’s (WBD) fundamental weakness and bleak growth prospects, the stock might be best avoided now.
Stocks to Buy:
TEGNA Inc. (TGNA)
TGNA is a media agency that operates television stations, multicast networks, and VAULT studios and offers news content to consumers across various platforms. The company also provides solutions for advertisers through TEGNA Marketing Solutions. It operates approximately 64 television stations in over 51 markets across the United States.
On November 18, Standard General’s acquisition of TGNA received approval from Team Telecom. In February 2022, TGNA and an affiliate of Standard General entered into a definitive agreement under which the Standard General affiliate would acquire TGNA for $24 per share in cash.
Soo Kim, Founding Partner of Standard General, said, “Standard General has a proven track record of increasing investment in local journalism and bringing new ideas and perspectives to local broadcasting. The pending transaction with TEGNA is about investing in and strengthening local stations, which brings value to our viewers and communities.”
On October 26, TGNA’s Board of Directors declared a regular quarterly dividend of 9.5 cents per share, payable on January 3, 2023, to stockholders of record as of the close of business on December 9, 2022.
TGNA’s dividend payouts have grown at CAGRs of 10.7% and 3.5% over the past three and five years, respectively. TGNA pays a $0.38 per share dividend annually, which translates to a 1.95% yield on the current price.
For the fiscal 2022 third quarter ended September 2022, TGNA’s revenue increased 6.2% year-over-year to $803.11 million. Its operating income grew 9.9% year-over-year to $232.26 million. The company’s net income rose 13.6% from the year-ago value to $146.16 million, while its EPS came in at $0.65, up 12.1% year-over-year.
Analysts expect TGNA’s revenue for the fiscal year ending December 2022 to increase 10.6% year-over-year to $3.31 billion. The company’s EPS for the ongoing year is expected to increase 34.3% from the previous year to $2.89. The stock has gained 2.3% year-to-date to close the last trading session at $19.71.
TGNA’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each weighted to an optimal degree.
The stock has a B grade for Quality. Within the Entertainment – Broadcasters industry, it is ranked #3 of 12 stocks.
Click here to see the additional POWR ratings of TGNA for Sentiment, Value, Growth, Momentum, and Stability.
Lee Enterprises, Incorporated (LEE)
LEE is a leading provider of local news and information and a platform for advertising, with daily newspapers, digital products, and marketing services. It is focused on three categories: Subscriptions to its product offerings, Advertising and Marketing solutions to local advertisers, and Digital Services to its customers.
On September 9, LEE added a 12-member team of experienced, veteran investigative and data-focused reporters to provide the industry’s most impactful local journalism. This demonstrates the company’s dedication to supporting journalism that emphasizes accountability and changes lives.
Furthermore, Lee newsrooms added more than 60 summer interns in 2022 as part of a program that provided real-world training in digital-first journalism for undergraduate and graduate student journalists in dozens of newsrooms. The company is prioritizing the future of local journalism by expanding its internship program.
LEE’s digital operating revenue increased 26.6% year-over-year to $46.19 million, while total digital revenue increased 26.8% from the year-ago value to 61.48 million for the fiscal third quarter ended June 26, 2022. Subscription revenue came in at $89.05 million, up 0.3% year-over-year.
For the fiscal year 2023, analysts expect LEE’s EPS to increase 31.2% year-over-year to $2.86. The company’s revenue for the next fiscal year is expected to grow 1.8% from the prior year to $792.40 million. The stock gained 2.8% in the last trading session.
LEE’s POWR Ratings reflect its strong outlook. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
The stock has a B grade for Stability, Value, and Sentiment. Within the Entertainment – Publishing industry, it topped the list of 7 stocks.
Click here to see the additional rating of LEE for Momentum, Growth, and Quality.
Stock to Sell:
Warner Bros. Discovery, Inc. (WBD)
WBD is a mass media and entertainment conglomerate that provides the most varied portfolio of content, brands, and franchises worldwide across television, cinema, streaming, and gaming in over 50 languages.
Profitability remains a concern for investors as faith in streaming fundamentals is waning. WBD reiterated its 2022 adjusted EBITDA guidance between $9 billion and $9.5 billion, a decline from a previous forecast of $10 billion.
The WBD sports staff has been reduced by 10%. Before this,14% of HBO and HBO Max employees were let go in August, and in October, 26% of personnel in the scripted, unscripted, and animation divisions were let go. WBD’s Sports Chair & CEO, Luis Silberwasser, believes that the company needed to make the cuts to stay competitive in the sports media marketplace.
For the third quarter of fiscal 2022 ended September 30, WBD’s costs and expenses increased 325.8% year-over-year to $12.01 billion. The company reported an operating loss of $2.19 billion, compared to an operating income of $329 million in the prior-year quarter. Its net loss available to WBD came in at $2.31 billion and $0.95 per share, compared to a net income of $156 million and $0.24 per share a year ago.
Analysts expect WBD’s loss per share of $0.13 for the fiscal 2022 fourth quarter (ending December 2022). Moreover, the company is expected to report a loss per share of $1.56 for the current fiscal year. The stock has slumped 15.2% over the past month and 55.2% year-to-date to close the last trading session at $11.34.
WBD’s poor prospects are also apparent in its POWR Ratings. The stock has an overall rating of F, which equates to a Strong Sell in our proprietary rating system.
The stock has an F grade for Sentiment and a D for Stability and Quality. Within the F-rated Entertainment – Media Producers industry, it is ranked #15 of 16 stocks.
Beyond what we stated above, we also have WBD’s ratings for Value, Momentum, and Growth. Get all WBD ratings here.
WBD shares were trading at $11.34 per share on Thursday afternoon, up $0.54 (+5.00%). Year-to-date, WBD has declined -55.53%, versus a -14.29% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More…