“The 2023 Taylor Swift tour is an example of that pent-up demand,” says Morningstar equity analyst Neil Macker, referring to the frenzied rush for tickets in an entertainment industry revival that crashed Ticketmaster’s system.
Although inflation is eating away at household income, there still seems to be some budget for leisure activities such as music concerts and films and other forms of leisure.
The following companies are well positioned to benefit from the secular trend in the entertainment industry, which is showing signs of resurgence from pandemic lows. Investors might want to keep an eye on these stocks as they are trading at a hefty discount to fair value, suggesting some upside potential.
The largest live entertainment company in the world, Live Nation (LYV) has over 570 million fans in 44 countries using its concert and ticketing platforms, the most notable of which is Ticketmaster. The company controls over 235 venues including the House of Blues, Hollywood Palladium and Spark Arena in New Zealand.
Live Nation, whose artist management agencies have over 400 clients, has a tremendous live entertainment presence that has helped the company “become one of the largest advertising and sponsorship platforms for music fans,” according to an equity Morningstar report.
The company is on track to surpass pre-pandemic levels, as evidenced by the highest quarterly visitors ever reported. Festival attendance rose 40% from the same quarter in 2019, leading management to forecast continued strong growth in 2023.
“While 2020 was a challenging year, we expect the reopening of venues in 2021 and the pent-up demand for fans and artists will help the company reach 2019-2022 revenue levels,” said Macker, who recently assessed the fair value of the Stock has updated to $105, “reflecting an even faster recovery from the impact of the pandemic than we previously thought.”
It projects compound annual revenue growth of about 22% through 2026, with more normalized annual growth of 8% for fiscal 2023-26.
“We expect the company to continue to use concerts as a ‘flywheel’ that drives the higher-margin ticketing, sponsorship and advertising segments, along with fans’ on-site spending,” he adds.
AMC Networks (AMCX) operates five domestic cable channels and a portfolio of international channels, reaching over 350 million subscribers in 125 countries. The main channel AMC is among the top 25 cable networks in the USA
Its stable cable networks include flagship AMC, WE tv, BBC America, IFC and SundanceTV. AMC remains the most ubiquitous channel, reaching over 78 million pay-TV homes in the United States
“AMC Networks has transformed its flagship channel, AMC, from a small cable channel showing classic films into a premium prestige platform for original content,” according to a Morningstar stock report.
The transformation, she adds, provides the network with growth potential, dependent on AMC’s ability to source and maintain strong original content and monetize programs internationally and across streaming platforms.
The company has successfully monetized programs like Better Call Saul with third-party streaming platforms. “However, the launch of AMC+ may lower the price of future streaming rights if the rights are no longer exclusive,” warns Macker, who recently slashed the stock’s fair value from $51 to $30, indicating weaker stocks Revenue in the third quarter is attributable.
The company has shifted from showing lower-rated movies to original content, a move “spurred by the success of shows like Mad Men and The Walking Dead,” notes Macker.
However, he warns that AMC operates in an “extraordinarily competitive media market” and relies on relatively high advertising revenues that are exposed to the economy and business cycles.
Nexstar (NXST) is the largest television station owner/operator in the United States, with 199 channels in 116 markets. 155 of the 199 full-fledged stations belong to the four national networks: CBS (49), Fox (42), NBC (35) and ABC (29). Nexstar has networks in 12 of the top 20 television markets and reaches over 68% of US TV homes.
The entertainment company also owns NewsNation (formerly WGN), a nationwide pay-TV network, and a 31% stake in Food Network and Cooking Channel.
“The company’s large scale, coupled with increased political advertising spending, has increased the importance of elections,” said a Morningstar stock report, which emphasized that the company “will continue to benefit from growth in political advertising spending.” could help offset weak local and national ad growth.
The report predicts that political revenue will continue to grow, while core advertising revenue may decline on an organic basis as digital platforms continue to crowd out analog platforms.
“Some of that loss is mitigated by Nexstar’s digital efforts, which are focused on local advertisers,” Macker assures, noting that over 70% of non-political ad revenue at the local level comes from selling ad time to local businesses, including Restaurants, , car dealerships and retailers.
The company recently posted a solid third quarter, in which net sales rose to $1.27 billion, or 9.7% from the year-ago quarter, led by strong growth in political ads and digital revenue.
Macker puts the stock’s fair value at $195, which implies an adjusted price-to-earnings ratio of 9 for 2022 and a free cash flow yield of 15%.