Stock pickers rarely do a proper analysis of sectors and stocks within each sector to find the hidden gems, or standout stocks that may provide much-needed diversification in a portfolio. In today’s inaugural column we study the consumer discretionary sector (XDJ), which comprises a range of industry groups exposed to the whims of the Australian consumer such as retailing; media; consumer durables & apparel; hotels restaurants & leisure; and automobile & components.

In looking at the chart below, you’d be right in thinking that the sector had a pretty rough year – particularly given the ASX200 has been hit hard yet has outperformed the XDJ by almost 13%. The thing is, although it has performed badly, that’s just the tip of the iceberg; the sector has a 5-year negative return of more than 50%. Today, the index sits near GFC lows.

Chart: XDJ 1 year price chart as at 28/10/2011, source: Yahoo 

Beaten down retail stocks have pushed the index lower, with David Jones, Harvey Norman and Myer suffering from a fallout in consumer demand. Media stocks haven’t fared much better – Fairfax (FXJ) is down 38% for the year, Ten (TEN) has dropped 36% and Kerry Stokes’ SevenWest Media (SWM) has haemorrhaged 51%. Some media companies have survived better than others, particularly those that have been successful in making a move online.

As the market has bounced off its September lows, media stocks have surged with the rest of the market. SevenWest has soared 37% in October, Fairfax is 16% higher and REA Group has rallied 11%. 

However with just six stocks in positive territory and an average share price loss of 17.6%, media has certainly been an industry group to avoid over the past year. More than half of the companies have lost more than 20% of their value over the year. (See the table at the bottom of the article for full details.)

Despite the gloom hanging over media stocks, there have been some bright spots with the takeover of Austar and REA Group’s continued surge as its global portfolio goes from strength to strength. Even Newscorp managed to eke out a 0.6% gain in a year that the company would rather forget. A phone tapping scandal that closed the 168-year old News Of The World and a failed bid for BSkyB plagued the company, sending the share price into a tailspin before staging a strong recovery over the past two months. 

This week we’ll focus on the $29 billion “Media” industry group – one of the five industry groups within the sector. 

Sector: Consumer Discretionary

Code: XDJ

1 year return: -20.06%

Industry Group: Media

Companies: 19

Largest: Newscorp (NWS), $13.4 billion market cap

Top gainers (12 months): Austar +21.0%, Village Roadshow +19.2%, REA Group +17.0%

Biggest losers (12 months): APN News & Media -54.8%, Sevenwest -51.0%, Southern Cross Media -46.0%

With a $13.4 billion market cap, Newscorp (NWS) dominates the $29 billion media industry group. Despite tumbling by over 50% this past year, Kerry Stokes’ Sevenwest Media is next in line with a market cap of $2.3 billion, followed closely by Fairfax at $2.25 billion. A solid 17% gain over the past year has propelled rising star REA Group into fourth spot. Sky Network, Packer’s Consolidated Media, Austar and Ten Network round out the list of billion dollar Aussie media companies.

Sector Outlook

According to the Australian PwC Entertainment and Media Outlook 2011-2015, investors should expect further revenue declines in structurally challenged segments of the media, resulting in negative average growth rates over the next five years.

“Affected segments have a clear imperative to secure new digital revenue streams to remain relevant in the industry,” said David Wiadrowski, PwC head of communications. “We are in a golden age for consumers as entertainment and media organisations look to find new models to meet the needs of empowered consumers who are increasingly time-poor but digital-savvy,” Mr Wiadrowski says.

A key challenge for organisations is convincing consumers to pay for content. With the digital explosion, the expectation that content can be accessed for free has become the norm. “The inexpensive nature of most apps combined with the success of the free-to-air digital television channels is reinforcing this expectation,” Mr Wiadrowski says.

PwC predicts that over the next five years digital technologies will progressively increase their influence. “By 2015 PwC believes most of the successful entertainment and media companies will have digital collaboration infused into their DNA,” Wiadrowski says. “We are seeing this now as traditional media organisations embrace digital distribution: newspaper companies are hiring video producers and technologists are partnering with content companies to enrich consumers’ experience with greater interactivity.”.

Goldman Sachs media sector analysts concur with PwC on the structural challenges facing media; the broker recently downgraded forecasts for Australian economic growth and forecasted sharp falls for Australian advertising in particular.

Goldman Sachs predicts that ad revenue will contract over the next year, falling 1.1%; its previous forecast was for growth of 2%. If the companies can make their way through the next year the future looks brighter, with Goldman Sachs predicting growth of 4.3% in 2013.

Analysts tend to agree that lower consumption and higher unemployment will impact the media sector. As such, target prices across the media sector have been sliced by 11%; investors are warned to reduce exposure to media players purely reliant on the Australian advertising market.

Top Gainer – Austar (AUN)
Market capitalisation: $1,500 million
Price/earnings ratio:  24.65 times
Share price: $1.18


Chart: Share price over the year to 28/10/2011 versus ASX200 (XJO)

Although recent reports would lead you to believe that the company was in trouble, the top performer over the past year was in fact takeover target Austar. Truth be told, without the bid the company would have been firmly in the losers’ list.

Rival Foxtel has launched a $2.5 billion takeover offer for Austar, and the transaction is expected to be finalised in early 2012, pending approval from the Australian Competition and Consumer Commission (ACCC). The takeover has been beset by ongoing problems and delays from the regulator, and the uncertainty has weighed on the company’s profit. But not on its share price, with the takeover bid sending the share price northward despite the headwinds faced both for the takeover and with the company’s outlook.

This week Austar released its unaudited results for the three months to September 30, which show a profit of $11.4 million, down 50% from the previous corresponding period. Austar says it will be a challenge to win new subscribers given weak sentiment, but its focus is on controlling costs. “As we indicated in our half year results the consumer environment is tough, this is still the case,” chief executive John Porter said in a statement on Thursday. “While we experienced marginal growth in our subscriber numbers, we were able to control costs and achieve a very pleasing financial result.” The outlook for subscriber growth remains challenging with consumer sentiment at an all time low, but demand conditions should gradually improve, Mr Porter says.

The ACCC is due to report its decision on the Foxtel takeover bid on November 30. Some brokers believe that there’s a risk it could be knocked back and advise to avoid the stock and look elsewhere for opportunities.


Biggest Loser – APN News & Media (APN)
Market capitalisation: $551 million
Price/earnings ratio:  6.36 times
Share price: $0.88


Chart: Share price over the year to 28/10/2011 versus ASX200 (XJO)

APN has been on a steady decline all year, and unlike other media stocks has not benefited from a rally in October. It sits just off its annual low and is down 54.8% over the past 12 months. Richard Batt, Shadforth Financial Group points out that APN’s interim result for the six months to June 30, 2011, revenue was flat at $508 million, but its net profit after tax halved to $21.8 million. Although in line with guidance, the company indicated that its publishing businesses had been through a challenging period, as weak retail markets and natural disasters had impacted earnings. “In the current economic environment, it’s difficult to know how corporate spending will impact APN’s earnings over the short term and, accordingly, we believe better opportunities exist elsewhere in the market,” says Batt.

Although Batt may be warning investors off APN Shawn Uldridge of William Shaw Securities says that there’s a possibility of corporate activity. “In this space, we have seen corporate activity across all areas, including the Ten Network, Consolidated Media and Austereo,” he says. “We wouldn’t be surprised if APN was targeted at the corporate level within the next year or two.”


Largest by market cap – Newscorp (NWS)
Market capitalisation: $13,455 million
Price/earnings ratio:  14.61 times
Share price: $16.85


Chart: Share price over the year to 28/10/2011 versus ASX200 (XJO)

Considering the headwinds facing the industry and the internal turmoil experienced by the goliath of the Australian media industry News Corp, its share price has held up remarkably well. Sure the current $5 billion dollar share buyback isn’t hurting the share price but News has outperformed the ASX200 and even boasts a small gain for the year. Brokers think that there’s plenty left in the tank. Morningstar has upgraded News to “Accumulate” with a price target $18.45, while Deutsche has placed a price target $20.50 on Murdoch’s Australian arm, a 22% premium to Friday’s closing price.

Andrew Inglis, Shadforth Financial Group has a hold on News saying that although recent international investigations into News Corp have reflected poorly on the company’s image, there may be a silver lining. “NWS is under intense political scrutiny and, in our view, it’s unlikely that regulators will allow NWS to make any significant – often overpriced – acquisitions in the near future,” he says. “NWS has an excellent mix of media businesses producing very strong cash flows and debt is negligible.” Inglis believes that shareholders will start to reap the benefits from increasing dividends, the current $US5 billion share buyback and a rising share price.

Meanwhile Peter Russell of Russell Research has a sell on the stock, stating that despite the company’s global footprint its performance in new media has been modest. “Move on while a $US5 billion buy-back helps the share price,” he advises.


Rising Star – REA Group (REA)
Market capitalisation: $1,703 million
Price/earnings ratio:  23.07 times
Share price: $12.93


Chart: Share price over the year to 28/10/2011 versus ASX200 (XJO)

REA Group, which owns and operates real estate and commercial stgelopment sites in Australia including the ubiquitous, has enjoyed strong organic growth from establishing a dominant position in Australia’s real estate advertising market. Monthly traffic to REA’s Australian website is a whopping 7.6 million visits from 6.3 million visitors (almost 30% of the population), topping the traffic to,,, and 

Source: REA Group from Nielsen Online March 2011

The chart above tells the tale of REA’s stellar growth in visitor numbers to its Australian website. In terms of the number of unique visitors to media sites it is second only to – no small feat by any stretch of the imagination. REA is also expanding overseas and is enjoying solid growth via its Italian website

Deutsche is keen on the stock, reiterating a buy on the online real estate company several times over the past few months. James Samson of Lincoln Indicators also had a buy on REA earlier this year. Samson said the number of real estate agents paying for advertising on had risen from 2391 to 11,531 during the six months to December 31, 2010. “With the site becoming one of the dominant players in Italy’s online real estate market, it’s clear that European expansion is an opportunity for the company to explore in the future,” he says.

Rob Hopkins, Managing director of Smallco Investment Manager is also keen on the stock. “Encouraging within the online real estate advertising group’s 35 per cent EPS growth at half year were revelations that losses within its Italy-base operation had finally stabilised,” he says. “The company is actively seeking new acquisitions and has been eyeballing French real estate site ROE 37.6 per cent and dividend yield 1.6 per cent.”


Media Industry Group*, Consumer Discretionary Sector

Company ASX code Last price ($) Market Cap ($) 52-wk high ($) 52-wk low ($) 1 yr change (%) div yield (%) EPS P/E
 Almagamated Holdings AHD $5.60 881,890,582 6.78 5.10  -11.0% 6.6 0.88 6.39
APN News & Media APN $0.88 551,434,988 2.01 0.735  -54.8% 12 -0.07 -12.5
 Austar United AUN $1.18 1,500,376,770 1.46 0.865  +21.0% 0 0.13 8.87
 Broadcast Services BSA $0.20 45,558,020 0.315 0.177  -23.5% 10 0.04 4.98
 Beyond International BYI $0.66 40,175,714 0.80 0.60  -44.4% 9.2 0.09 7.55
 Consolidated Media CMJ $2.78 1,561,901,289 3.39 2.10  -21.5% 5.9 0.18 15.59
Fairfax Media FXJ $0.96 2,257,877,496 1.50 0.675  -37.6% 3.1 -0.17 -5.65
 Macquarie Radio MRN $0.94 72,631,703 1.30 0.75  -10.0% 7.5 0.08 12.11
 Newscorp NWS $16.85 13,455,078,058 18.48 13.32  +0.6% 0.8 0.97 17.4
 OOHMedia OOH $0.16 80,196,044 0.29 0.15  -20.9% 0 0.02 8.89
Photon Group PGA $0.04 67,799,022 0.105 0.026  -36.8% 0 -0.05 -0.88
Prime Media PRT $0.68 249,104,606 0.865 0.60  +4.6% 6.6 0.07 9.19
 REA Group REA $12.93 1,703,071,058 14.34 9.92  +17.0% 2 0.53 24.35
 STW Communications SGN $0.89 322,087,610 1.375 0.70  -7.3% 8.1 0.11 7.99
 Sky Network Television SKT $4.28 1,665,518,280 4.48 3.68  +3.9% 3.3 0.24 17.97
 Sevenwest SWM $3.61 2,331,047,547 7.42 2.49 -51.0% 12.5 0.39 9.35
 Southern Cross Media SXL $1.26 889,265,719 2.17 0.905  -46.0% 7.9 0.12 10.91
 Ten Network TEN $0.92 956,391,599 1.66 0.80  -35.8% 5.7 0.01 67.28
 Village Roadshow VRL $2.87 434,759,898 3.49 1.66  +19.2% 5.6 1.36 2.11


 *Only stocks with a market cap of more than $30,000,000 have been included, there are 12 other small- and micro-caps in the media industry group.

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