Media

In early-April we boosted our S&P cable & satellite exposure to above benchmark, as cord-cutting has been less destructive than feared and the industry continues to successfully lift subscription rates in a world plagued by deflation. Similarly, in mid-June we lifted the S&P movies & entertainment index to overweight, because value was simply too attractive to ignore amidst signs of fundamental improvement. For instance, the latest ISM services release was comfortably above the boom/bust line, signaling that services-industry demand remains upbeat. That is consistent with solid media pricing power (second panel). Entertainment admissions, cable network and cable TV pricing power are all showing solid gains. The better-than-expected June employment report should soothe any lingering concerns about the sustainability of discretionary outlays on media services, and provide confidence in the durability of pricing power gains. Consequently, good value should ultimately be realized. Bottom Line: We reiterate our recent upgrade to overweight. The ticker symbols for the stocks in this index are: BLBG: S5MOVI - DIS, TWX, FOXA, VIAB, FOX. bca.uses_in_2016_07_13_001_c1 bca.uses_in_2016_07_13_001_c1

The S&P media sector has been in a consolidation phase for over two years, in relative performance terms. That is consistent with cash flow trends, which flat-lined alongside a slump in sales growth and rising costs. However, we expect both relative performance and cash flow to turn higher. Sales growth has hooked back, because the industry has been able to introduce new services and raise selling prices by enough to drive up consumers' share of spending on media services (second panel). Pricing power has surged in both the cable and entertainment industry. If cash flow grows again, as we expect, then an increasing scarcity of media shares outstanding should ultimately act as an upward force on share prices as investors boost allocations to the space. We reiterate our recent moves to overweight in both the S&P cable & satellite and S&P movies & entertainment sub-components. The ticker symbols for the stocks in this index are: BLBG: S5MEDA - DIS, CMCSA, TWX, FOXA, CBS, OMC, VIAB, IPG, SNI, DISCA, NWSA, TGNA, DISCK, FOX, NWS. bca.uses_in_2016_06_29_001_c1 bca.uses_in_2016_06_29_001_c1

Media stocks have been through a choppy consolidation phase in recent years, as investors digest competitive threats and changing consumption habits. However, evidence is materializing that media companies are through the worst. Specifically, value has been restored to the S&P movies & entertainment (ME) index. Consumers continue to demonstrate a healthy appetite for content consumption: personal spending on recreation and electronics has reaccelerated as a share of total outlays. While, cord cutting, skinny pay TV packages and OTT threats have cast a dark cloud over both content creators and cable companies, evidence suggests that gloom has been excessive. Personal spending on cable services is hitting new highs in level terms, even excluding price increases, and is soaring in growth rate terms. Importantly, other elements of the industry are strong. Recreation spending is growing at a mid-single digit rate, in real terms, underscoring that both movie and theme park admission traffic is healthy. That is facilitating aggressive price hikes, as evidenced by the surge in the CPI for entertainment. Against this solid revenue backdrop, wages are barely growing, a recipe for profit margin resilience. We recommend using price weakness and near-term volatility to augment positions to overweight, which brings our overall consumer discretionary sector weighting up to neutral. Buy Movies & Entertainment Buy Movies & Entertainment

This week's report discusses whether bad news is good news for stocks, or a potential restraint. Tumbling long-term yields argue for augmenting consumer discretionary sector weightings, <i>via</i> the movies & entertainment group.

Earlier this month we made a full shift from underweight to overweight in the S&P cable & satellite index, a sub-component of the broader media sector, in response to receding risk that cord cutting and skinnier cable packages would threaten profits. Given that the outlook for the heavyweight S&P movies & entertainment index has improved, it no longer pays to be underweight. This group has underperformed the broad market since early January, savaged by uncertainty about the outlook for key cable networks, particularly ESPN. However, if our cable read is accurate, then material and widespread deterioration in the value of high-quality specialty channels and networks is unlikely. In fact, one of the drivers of higher media spending has been recreational outlays. That improvement may reflect a delayed response to the windfall from lower fuel bills (second panel). Importantly, attendance at theme parks, movie theaters and other attractions has been sufficiently strong to generate increased ticket prices (third panel). That will buffer any advertising slippage from TV to digital. At the same time, wage inflation is non-existent. Against this backdrop, there is less risk of sustained profit margin pressure in the movies & entertainment index. Underperformance has returned valuations to an attractive level, with the relative forward P/E well below the broad market and not far above the Great Recession low (bottom panel). This warrants a lift in our underweight stance. Bottom Line: Lift the S&P movies & entertainment index to neutral, and take the S&P media group off the high-conviction underweight list. For additional details please see yesterday's Weekly publication. The ticker symbols for the stocks in this index are: BLBG: S5MOVI - DIS, TWX, FOXA, VIAB, FOX. Retuning Our Media Exposure Retuning Our Media Exposure

Sell the bounce in banks, which face a triple whammy of earnings threats. This will reduce our financials sector allocation to underweight, making room for last week's energy upgrade.

Earlier this month we made a rare shift from underweight to overweight in the S&P cable & satellite index, because fears of cord cutting and skinnier cable packages undermining profitability were no longer justified. In fact, in real terms, consumer outlays on cable have jumped to new highs. Unsurprisingly, the latest consumer price report showed that cable TV inflation is following in the footsteps of spending: the rate of pricing power growth is accelerating (bottom panel). That implies low subscriber churn, reducing the likelihood that capital spending will need to materially increase to maintain competitiveness. Importantly, cyclical share price momentum is still well below levels that have marked previous interim relative performance peaks, and should continue to climb based on the uptrend in real consumer spending (middle panel). We reiterate our upgrade to overweight. The ticker symbols for the stocks in this index are: BLBG: S5CBST - CMCSA, CVC, TWC. bca.uses_in_2016_04_20_002_c1 bca.uses_in_2016_04_20_002_c1

Our bearish thesis on the S&P cable & satellite index is not playing out. Instead of skinnier cable packages and cord cutting denting profitability, the industry has managed not only to sustain pricing power, but also to increase selling prices at a faster rate than overall inflation. The latest personal consumption expenditures report showed that cable outlays, in real terms, have begun to march higher again after flat-lining for two years. The cable industry has monopolistic properties, enjoying decades of rising 'real' pricing power. Now that real spending has reaccelerated, it will boost the odds that real selling prices will follow suit. One of our fears had been that slowing sales and rising subscriber churn would force cable providers to ramp up investment to retain customers. However, the largest cable distributors reportedly saw their total cable subscribers decline only 1% in the fourth quarter, similar to the loss in the third quarter, reinforcing that cord cutting is ebbing. The downtrend in capital spending-to-sales has been a major driver of the expansion in operating margins. If capital spending is not going to accelerate, then profit margins won't come under much pressure. We made a full shift to overweight in yesterday's Weekly Report. The ticker symbols for the stocks in this index are: BLBG: S5CBST - CVC, CMCSA, TWC. bca.uses_in_2016_04_05_002_c1 bca.uses_in_2016_04_05_002_c1

Equities are back in overshoot territory. We added the health care sector to our high-conviction overweight list, boosted managed care to overweight and put health care equipment on downgrade alert. Buy cable stocks.

Media stocks are undergoing a de-rating, led by the heavyweight S&P movies & entertainment index. Sales prospects have been undercut by shifting viewing habits, which is creating uncertainty surrounding the value of network assets. The ISM services index warns that recreation spending will continue to retreat, which also has implications for ad revenue. Our Advertising Indicator is already deep in negative territory, consistent with the overall profit contraction and our expectation that the corporate sector will retrench. Meanwhile, programming costs remain high, adding to profit margin stress emanating from weakening top-line performance. This toxic mix should ensure that all of the shareholder friendly activities that have supported valuation expansion since 2009 will dissipate, to the detriment of premium multiples. We have a high-conviction underweight on the overall media sector, including the S&P movie & entertainment index. The ticker symbols for the stocks in this index are: DIS, CMCSA, TWX, TWC, FOXA, CBS, OMC, VIAB, IPG, NWSA, DISCK, TGNA, CVC, SNI, DISCA, FOX, NWS. bca.uses_in_2016_02_12_002_c1 bca.uses_in_2016_02_12_002_c1