Zacks Equity Research discusses Warner Music Group WMG, News Corp. NWSA, Lions Gate Entertainment (LGF.A) and IMAX Corp. IMAX.

Industry: Entertainment

Link: https://www.zacks.com/commentary/2159035/4-stocks-to-watch-from-a-prospering-entertainment-industry

The Zacks Film and Television Production and Distribution industry is benefiting from a spike in demand for digital entertainment, fueled by limited capacity and operational limitations in movie theaters, theme parks and cruise lines. Increased consumption of media, music and news over the web, triggered by the work-and-learn-at-home wave, has been a key catalyst for industry participants like Warner Music Group, News Corp., Lions Gate Entertainment and IMAX Corp.

Companies have been focusing on a superior product strategy and prudent capital investments. Steady recovery in the advertising spending environment and resumption of production pipelines bode well for film and television production companies.

Industry Description

The Zacks Film and Television Production and Distribution industry comprises companies involved in film and TV production, distribution and exhibition. The main activities of the industry participants include the production and distribution of entertainment content to theaters, TV networks, video-on-demand platforms, streaming services and other exhibitors. Imax offers entertainment technology and specializes in motion picture technologies and presentations.

Industry participants produce and distribute motion pictures for theatrical and straight-to-video releases besides TV programming. These players are heavily dependent on the box-office performance of their films, both domestically and internationally, the number of film releases and the ratings of TV shows.

3 Film and Television Production Industry Trends in Focus

Over-the-Top Services Gaining Prominence: Companies involved in content creation are looking to distribute content through over-the-top services to leverage the popularity of their franchises. With this, they are looking to provide exclusive content and a differentiated experience. However, streaming companies are increasingly producing original and award-winning feeds to reduce licensing costs and excessive dependence on third-party content providers. This is likely to hurt industry participants’ content distribution strategy.

Binge-Watching Driving Consumption: Factors such as binge-watching, deepening Internet penetration, and advancement in mobile, video and wireless technologies have got viewers glued to small screens. In order to keep pace with new consumption patterns, industry participants are turning to digital content distribution. The emergence of digital capabilities is making consumer data easily available to companies. With the use of AI tools, production houses are gaining a better understanding of user preferences. This helps them produce content that strikes a chord with viewers. However, increasing spending on content and sales & marketing is hurting profitability due to stiff competition from streaming players.

Technological Advancement Aids Prospects: Exhibitors are turning to highly efficient and cost-effective technologies like laser-based projection systems to enhance image quality and the entire movie experience. Additionally, the use of technologies like motion seating, immersive audio systems and interactive movies, among others, is expected to enhance the viewing experience. The increasing adoption of AR and VR technologies bodes well for industry participants. However, the evolution of alternative motion picture distribution channels, such as home video, pay-per-view, streaming services, video-on-demand, Internet and syndicated and broadcast television, is hurting exhibitors.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Film and Television Production and Distribution industry is housed within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #79, which places it in the top 32% of more than 246 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Beats S&P 500, Sector

The Zacks Film and Television Production and Distribution industry has outperformed the Zacks S&P 500 and its own sector in the past year.

The stocks in this industry have collectively gained 19.6% compared with the S&P 500’s return of 13.5% and the Zacks Consumer Discretionary sector’s increase of 10.2% over the same time frame.

Industry’s Current Valuation

On the basis of the trailing 12-month price-to-sales (P/S), a commonly used multiple for valuing Film and Television Production and Distribution stocks, the industry is currently trading at 1.65X compared with the S&P 500’s 3.67X and the sector’s 1.75X.

Over the past five years, the industry has traded as high as 2.49X and as low as 0.92X, recording a median of 1.52X.

4 Film & Television Stocks to Watch Right Now

IMAX: IMAX has been riding on the impressive performance of blockbuster titles so far in 2023. Strong showing of Hollywood titles is aiding gross box office collection besides the successful running of local language titles in China, Japan, India and South Korea. A solid slate of movie releases is expected to aid its top line in 2023 and 2024. Recent partnerships with leading multiplexes in countries like North America, Vietnam, Mexico and Morocco are a big positive.

Recovery in the pace of theater system installations and higher IMAX maintenance sales are major positives. Moreover, a steady cash balance and flexible business model position it well to expand and increase market share. The company expects to record $1.1 billion in the global box office for 2023 with 110-130 system installations worldwide.

Last month, this Zacks Rank #1 (Strong Buy) company presented its next-generation streaming technology, Stream Smart, as part of its global technology platform strategy. Stream Smart is an enterprise software developed through a combination of groundbreaking scientific research, advanced engineering, trusted studio relationships and collaboration with Disney Streaming Services and SSIMWAVE. It focuses on delivering the highest-quality video content at reduced distribution costs.

The Zacks Consensus Estimate for IMAX’s 2023 earnings has moved north by 1.2% to 86 cents per share over the past 30 days. IMAX shares have gained 30.7% year to date.

Warner Music Group: This Zacks Rank #3 (Hold) company is benefiting from continued growth in Recorded Music licensing and Music Publishing synchronization revenues, including revenues from emerging streaming platforms. Moreover, continued investments in international markets are expected to aid the top line. Warner Music Group has shifted its focus from relying solely on celebrity influence and is now strategically targeting various elements of the value chain.

The company has made investments in media platforms like HipHopDX, IMGN, Uproxx and several others. These platforms have the potential to significantly expand WMG’s reach to a global audience of music enthusiasts.

WMG and TikTok have entered into a partnership aimed at benefiting WMG’s artists and songwriters, as well as TikTok’s vast user base worldwide. This multi-year agreement grants TikTok, TikTok Music, CapCut and TikTok’s Commercial Music Library licenses to the repertoire of Warner Recorded Music and Warner Chappell Music. Warner Music Canada and Warner Music India have teamed up to establish a collaborative initiative named 91 North Records, which is aimed at supporting artists of South Asian backgrounds.

Warner Music Group shares have declined 11.2% year to date. The Zacks Consensus Estimate for the company’s fiscal 2023 earnings has remained steady at 89 cents per share over the past 30 days.

News Corporation: The company is benefiting from prudent strategic efforts, which include the ongoing digital transformation of the business, and investments in Digital Real Estate Services, Dow Jones and Book Publishing segments. News Corporation has been diversifying its revenue streams through strategic acquisitions and operational enhancement. It is optimistic about acquisitions of the OPIS and Base Chemicals businesses that are likely to enhance Dow Jones’ information services business.

The company is well-positioned to grab opportunities generated from technology sharing across geographies and businesses, and bundled offerings of enriched content to consumers and advertising partners.

News Corporation’s shares have gained 9.9% year to date. The Zacks Consensus Estimate for this Zacks Rank #3 company’s fiscal 2024 earnings has remained steady at 73 cents per share over the past 30 days.

Lions Gate Holdings: The company is benefiting from a strong pipeline of content on Starz’s platforms that boosts viewership and increases the subscriber base of its OTT platforms. Management has been planning to spend cautiously on content and not chase subscribers, therefore focusing on profitability. It would now also look for bundling and packaging opportunities.

Lions Gate has delayed plans to split from Starz until early in 2024. This will help the two core businesses pursue separate strategic and financial paths, ensuring better results. Starz would focus on the United States, U.K. and Canada, exiting Latin America before the end of the year.

In August, Lionsgate acquired Entertainment One’s (eOne) TV and film operations from Hasbro for over $500 million. The transaction is expected to close by the end of the year. As part of the deal, Lionsgate has bought eOne’s scripted and unscripted TV production, all film production and related global distribution, a 6,500-plus title content library and Hasbro’s interest in eOne’s Canadian film and TV business.

Lionsgate’s shares have returned 42.4% year to date. The Zacks Consensus Estimate for this Zacks Rank #3 company’s fiscal 2024 earnings has remained steady at 38 cents per share over the past 30 days.
News Corporation (NWSA): Free Stock Analysis Report

IMAX Corporation (IMAX): Free Stock Analysis Report

Lions Gate Entertainment Corp. (LGF.A): Free Stock Analysis Report

Warner Music Group Corp. (WMG): Free Stock Analysis Report

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