Which Cable Companies Will Roll Over First?
Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Industries rise and fall in favor just as stocks do. Those who are alert to the patterns can make money.
Right now, for instance, 3D printing is out of favor. What is in favor? Big entertainment companies.
All of the “big five” – Comcast, Disney, News Corp., Viacom and CBS – are trading near their highs. Comcast's acquisition of the rest of NBC Universal is one reason. News Corp.'s pending split into two companies is a second. A third reason is a raft of promised deals for infrastructure spurred by more active capital markets, as the Financial Times writes.
This is going to roll over. What goes around comes around. The weaker players will be left vulnerable by the next turn of the market.
But which are the weaker players?
CBS (NYSE: CBS) has been on a tear lately, in sympathy with the general trend. This was a $30 stock in the middle of January. It's now at nearly $45.
But is there a good reason for this sudden burst of speculation? Not according to the financials. The company's revenues for 2011 were little changed from those for 2008. And the most recent report is a disappointment – Zacks called both revenues and profit light.
There are no rumors of a buyout, and while the CBS network has good ratings compared with peers, the rest of its cable line-up is poor in a market where the number of channels you own matters more than your licenses.
Then there is CNET, which CBS agreed to buy for $1.8 billion in 2008. The site seems to be collapsing, writes The Verge, in the face of corporate interference with news gathering. The Verge itself is just one of many examples of how CNET, which was totally dominant in its niche at the time of the sale, has hit the skids. AOL's TechCrunch, Om Malik's GigaOM, and a host of others have all made big strides in the last several years, while CNET traffic has stagnated. (Full disclosure: I worked for CNET's ZDNet affiliate from 2005-2010.)
It could get worse soon. AllThingsD, a site launched by Wall Street Journal writers Kara Swisher and Walt Mossberg, may soon go on the block. It's getting the NBA free agent treatment right now, and an increased injection of capital is almost certain.
But the biggest reason to worry about CBS is a shortage of outlets. This market is all about vertical integration – owning the product and how it's sold – and CBS has not kept up in the channel-buying market. Outside CNET, the company is little changed from what it was a decade ago. That makes it a weak sister.
Viacom (NASDAQ: VIAB) shares began hitting new highs at the end of January on what The Hollywood Reporter called a strong earnings report. But it wasn't that strong. Profits, in fact, fell. So did revenues, by 16%.
Viacom owns both TV production, cable networks, and a film company, Paramount. Paramount's box office was especially weak in the quarter. Nickelodeon rolled over with the fade-out of the Spongebob Squarepants franchise. MTV and VH1 don't even do music anymore – they're basically reality channels like those on dozens of other networks.
Worse, majority owner Sumner Redstone turns 90 in May. These problems also affect CBS, because Redstone is the controlling shareholders of both companies. The succession plan for Redstone remains murky.
In theory this should be bullish for holders of both stocks, as Redstone's death would leave both companies vulnerable to a sale, and assuming the sector remains strong that would be at a very high price.
No White Knight
But who could buy? At present levels these companies are worth nearly $60 billion. Could Fox Corp., the entertainment spin-out of NWS (NASDAQ: NWSA), engineer a Viacom take-out? It's possible, but just barely. Rupert Murdoch, no spring chicken himself, is selling voting stock. Unlike Redstone, he's doing estate planning, and has placed people outside his family in charge of both operating units.
A move by Disney or Comcast would probably raise all kinds of anti-trust hackles and take years to consummate. Meanwhile shareholders would be left with declining assets.
As any industry goes through these hype-and-bust cycles, smart Fools will dump the weak sisters for a profit and wait for a new entry point among the winners. CBS and Viacom are the weak sisters here. When the fall comes, they'll fall hardest. And that could happen at any moment.
DanaFBlankenhorn owns shars of News Corp. and no position in any other stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!