A Guided Tour of the Market 8

Media

Media companies generate cash by producing or delivering a message to the public. The message, or content, can take several shapes, including video, audio, or print.

Companies that rely on one-time user fees sometimes suffer volatile cash flows because they're heavily affected by the success of numerous individual products, such as newly released films or novels. While having a string of hits can result in a bonanza for the firm, the converse is also true: Several flops in a row can lead to disaster. This uncertainty can make it difficult to forecast future cash flows.

Subscription-based businesses are generally more attractive than one-time user fee businesses because subscription revenue tends to be predictable, which makes forecasting and planning easier and reduces the risk of the business. There is another advantage to subscriptions: Subscribers pay upfront for services that are delivered at a later date.

Companies with advertising-based models can enjoy decent profit margins, which are often enhanced by high operating leverage. The reason for the high operating leverage is that most of the cost in an advertising-based model is fixed. [...] However, advertising revenue streams can be somewhat volatile – advertising is one of the first costs that company executives cut when the economy turns south, which is why advertising revenue growth tends to move with the business cycle.

Media firms enjoy a number of competitive advantages that help them generate consistent free cash flows, with economies of scale, monopolies, and unique intangible assets being the most prevalent. Economies of scale are especially important in publishing and broadcasting, whereas monopolies come into play in the cable and newspaper industries. Unique intangible assets such as licenses, trademarks, copyrights, and brand names are important across the sector.

http://books.danielhofstetter.com/the-five-rules-for-successful-stock-investing/

It is easier to make money in some industries than in others.

It is easier to make money in some industries than in others.

Some industries lend themselves to the creation of economic moats more so than others.

These are the industries where you will want ot spend most of your time.

The economics of some industries are superior to others.

You should spend more time learning about attractive industries than unattractive ones.

Every industry has its own unique dynamics and set of jargon.

Some industries (such as financial services ) even have financial statements that look very different from others.

Wade through the different economics of each industry and understand how companies in each industry can create economic moats - which strategies work and how you can identify companies pursuing those strategies.

Here are some areas of the market that are definitely worth more of your time exploring.

• Banks and Financial Services
• Business Services
• Health Care
• Media

These are not the four areas of the market with worthwhile investments.

They are highlighted because they contain so many wide-moat companies.

There are great firms in even the least likely areas of the stock market.

The goal is to help answer a few essential questions:

• How do companies in this industry make money?
• How can they create economic moats:
• What quirks does this industry have that an investor should know about?
• How can you separate successful from unsuccessful firms in each industry?
• What pitfalls should you watch out for?

Over the long haul, a big part of successful investing is building a mental database of companies and industries on which you can draw as the need arises.

That will make you a better investor.

Investor's Checklist: Media

Look for media companies that consistently generate strong free cash flow.  We like to see free cash flow margins around 10 percent.

Seek out companies that have high market share in their primary markets - monopolies are often great for profits.  Licenses, especially in broadcasting, also serve to reduce competition and keep profit margins high.

Seek out companies with a history of well-executed acquisitions that have been followed by higher margins.

A strong balance sheet enables media companies to make selective acquisitions without increasing the risk for shareholders or diluting the shareholders' ownership stake.

Look for candid management teams, a history of sensible acquisitions, and either conservative reinvestment of shareholders' capital or the return of capital to shareholders through dividends and stock repurchases.


Don't chase hits.  Buying a stock because there's a lot of buzz about a hit movie or TV show rarely pays off.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



Read also:
Investor's Checklist: A Guided Tour of the Market...

Daily Mail signals that the worst may be over

March 24, 2009

Daily Mail signals that the worst may be over
Dan Sabbagh, Media Editor

Daily Mail and General Trust (DMGT) said that its recession-hit local newspapers were showing the first signs of recovery, even as the company announced that it would shed another 500 staff across its regional titles.

The publisher behind the Hull Daily Mail and Bristol Evening Post is closing printworks, rationalising sub-editing across regions and shutting a handful of titles, in cuts that will reduce the staff on its local papers to 3,500.

Despite the redundancies, Peter Williams, the finance director, struck a note of cautious optimism. “For the past six or seven weeks, revenues have been flat in absolute terms, which means that rates of year-on-year decline will start to improve significantly as the year continues,” he said.

DMGT has made 1,000 employees at its regional titles redundant this year, including the latest cutbacks, but Mr Williams forecast that the most recent round of dismissals would be the last needed if revenues continued to hold at their depressed levels.

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Advertising slump leaves UK local papers in crisis
Daily Mail and General Trust warns of advertising collapse at regional newspapers
The company is closing “some of the smaller titles we launched when times were good”, Mr Williams said. He added that, despite the cuts, the company was “taking on even more reporters overall”.

DMGT believes that the real area of trading uncertainty is now for national newspapers. Display advertising in the Daily Mail and The Mail on Sunday - about 40 per cent of turnover - was down 24per cent in January and February. “Five months into our financial year, and it's the one area we can't predict, because it is so volatile. We've had weeks when we are up year-on-year, before another sharp decline,” Mr Williams said.

The 24 per cent figure would have been “a couple of percentage points better” had the London Evening Standard been excluded. The paper was sold last month to Alexander Lebedev, a Russian oligarch, who has pledged to fund its losses, estimated at £15 million a year, for about the next three years.

At the Northcliffe Newspapers regional division, advertising revenues fell 40 per cent in January, but that decline slowed in February. The overall decline in January and February was 37 per cent and what the publishing group described as “stabilisation” has continued into March. “The fact that we are talking about stabilisation is about the most encouraging thing anybody has said about the regional newspaper business in the last 18 months,” Mr Williams said.

Northcliffe Newspapers is on course to make a profit for the financial year to the end of September, but the figure is expected to be well below last year's £68 million in operating income.

Numis, the brokerage, wrote in a note: “Although we recognise the market's concern over B2C [consumer business], we believe Associated is a robust business, while the more challenged [regional newspaper unit] Northcliffe now represents just 15 per cent of Ebitda.”

DMGT also sells business information, owns Euromoney, the business-to-business group, and runs international exhibitions and an Australian radio group. These other businesses accounted for 61 per cent of sales last year and should bring in 70 per cent of operating profit this year.

DMGT shares closed up 8p, or 3.4 per cent, at 241p.

http://business.timesonline.co.uk/tol/business/industry_sectors/media/article5962710.ece