Morgan Stanley
  • Thoughts on the Market Podcast
  • Feb 23, 2021

Media Eyes the Great Reopening

With Ben Swinburne

Transcript

Welcome to Thoughts on the Market. I'm Benjamin Swinburne, Equity Analyst covering Media, Entertainment, Advertising and the Cable/Satellite industries. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the road ahead for media and entertainment in 2021. It's Tuesday, February 23, at 11 a.m. in New York.

When I get questions about the industries I cover, there's naturally a lot of discussion and focus on disruption. But despite all the attention on disruption, media and entertainment is also a very cyclical business, meaning the stock performance of these companies often has a direct relationship to the health of the economy. From that perspective, 2021 looks like a year of topline strength as the health of the global economy improves and we begin to emerge from the shadow of covid.

Before looking ahead, it's worth taking a moment to look back at 2020, since covid had a tremendous impact on pretty much every company we cover. Much of the world was locked down in their homes, streaming movies and music, reading and watching news, more eyeballs on digital advertising, and so on. But we were also in our homes, so theme parks took a hit, outdoor advertising, movie theaters... so some profound impacts.

As a result, last year, the best performing stocks in media and entertainment were up over 100% year on year, and the worst performing stocks were down over 50% year on year. So moving forward, some opportunities may lie with companies where the market may have overcorrected or overshot. We also want to be thinking about the cyclical recovery I mentioned earlier. As the world reopens, the average company in our coverage group is expected to see revenue increases of 20 - 30% in 2021.

So what does this all mean for investors? We're looking at three key themes.

First, the entirety of media - video, audio, publishing - is undergoing the transition from legacy distribution models to Internet distribution, and covid really accelerated this transition. In video, the streaming leaders have seen dramatic appreciation, and since November, even some TV based media companies have seen price appreciation thanks to some enthusiasm over an earnings mix shift - or at least a revenue mix shift - from legacy linear to streaming. The question is, can everyone build a streaming business? The answer is yes and no. Many of these companies generate healthy levels of recurring cash flows, have relevant brands, varying levels of production scale, and distribution relationships. As a result, all can, have, and probably will build streaming extensions or amplifications of their linear networks. They may not all emerge as leaders, but some may build streaming assets that could give markets conviction that they can grow revenues and earnings over the long term.

Second is the pace of re-opening, recovery, and a return to social gathering as we emerge from the pandemic. While we may never get back to pre-covid behavior, we're also not going to maintain covid behavior forever. In 2021, we should not be surprised if growth meaningfully slows or accelerates. Just as shares likely overreacted in 2020, they may overreact again in 2021. If we see a faster than expected reopening, keep your eyes on selected sports names, movie theaters and theme park exposure.

Third, we have a bullish view of the advertising recovery. Every data point on advertising that we've been hearing lately has been positive, and we remain of the view that we'll see a V-shaped ad recovery. In particular, out of home advertising names may be one of the most attractive ways to play this theme.

One final thought for investors is to keep your eyes on interest rates. If the economy is as strong as some expect, rates typically rise. At some point that will increase the rate the market discounts out-year earnings, which will have an outsized negative impact on long duration growth stocks. Because of this, investors will probably want to balance the growth players with the value names since rate normalization is something we can't ignore in this sector.

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Media and entertainment had a tricky 2020 with lockdowns pulling forward years of growth for some companies—and challenges to others. So, what happens now?

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