Kames: ‘There will be blood’ – why there is more pain to come for traditional media stocks

The sharp downturn in traditional media stocks is not yet over, with competition from streaming services continuing to put pressure on long-standing incumbents, according to Kames Capital’s Global Equity team.
Media stocks around the globe, including ITV and Sky in the UK, have seen share prices slide sharply in the face of the meteoric rise of streaming services from tech behemoths such as Netflix and Amazon.
Nonetheless, there could well be more pain to come for such companies, according to Craig Bonthron, the co-manager of the Kames Global Equity fund alongside Neil Goddin.
“Media CEOs are scrambling to retain market share, but it isn’t going well for them,” Bonthron says.
“The viewership of TV is declining, and alternatives like YouTube are rising in importance. The value individuals are looking for in cable TV bundles is quickly shifting to broadband and away from TV.”
The only compelling argument in media companies’ favour is valuation, with such stocks often tipped as buys because of the falls they have experienced.
However, for Bonthron and the team at Kames, the sector’s old guard continue to look unattractive, despite some names having shed more than a third of their value in the last year alone.
“Some cable companies have proven more resilient by offsetting the declining value proposition of their traditional offerings by increasing their broadband prices, but the tide is against them,” he says.
“Valuation is the last remaining argument that could convince us to own traditional media companies. But what valuation multiple do you put on a business that has declining prices, declining volumes and large amounts of debt? That one is easy: much lower than the current one.”
Instead of focusing on the old media dynasties, Kames’ fund has invested in the alternative media platforms in recent years.
“Within our global equity funds we sold most of our TV networks, cable companies and traditional advertising agencies over two years ago. We sold Disney even as investors were getting excited about the new Star Wars movies,” Bonthron says.
“To capture the rise of alternative media we have invested in Facebook, Tencent, Alphabet (Google), Cyberagent (digital advertising) and Activision (brand advertising on their gaming platform), all of which have been very profitable.
“Looking ahead, we believe that Alphabet and Facebook in particular have the scope to raise prices from their low base, and have more value to add for investors. In our strategies that can go short, we’ve also shorted select TV networks and advertising agencies. These positions have been successful in absolute terms with negative share price moves despite what one would typically expect to be a good cyclical backdrop for media companies.”
The Kames Global Equity fund is top quartile over the last three years having returned 16.6% over the last three years, versus the IA Global sector average return of 14.2%.