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Buy 4 Media Stocks as FCC Relaxes Media Ownership Rules

Zacks Equity Research

Yesterday, in a landmark 3-2 vote, the Federal Communications Commission (FCC) approved a sweeping rollback of rules that were stumbling blocks to consolidation in the media and entertainment industry. FCC’s new proposals will bring an end to several longstanding rules designed to limit the monopoly of local broadcasters.

U.S. media accounts for a staggering one third of the global media market. Nevertheless, this industry is lately going through severe fluctuations. One of the key reasons for volatile growth is stringent regulatory norms across all segments of the industry and high barriers to entry.

A New Look Less-Restrictive FCC

In January 2017, President Donald Trump elected the existing Republican commissioner Ajit Pai as the new Chairman of the FCC. The appointment of Pai, who appears to have exercised lesser restrictions, at the helm of the regulatory body, is likely to bode well for media companies. Relaxation of ownership rules may increase consolidation within media and lead to increased competition to the online digital platform.

The FCC’s decision will bring to an end of longstanding rules like restriction on cross-ownership of radio, newspaper and TV assets in a market and counting each station involved in joint sales agreements in owners’ ownership tallies. It will also end the rule of eight-voice which called for at least eight other independently owned outlets in the coverage area, after any ownership consolidation.

Earlier this year, the FCC took two major decisions to ease media ownership rules. On Apr 20, the regulatory body voted 2-1 to restore the “UHF-discount” that has allowed station groups to fall within media ownership limits. The rule allows media companies to count only half the coverage areas reach of their UHF (ultra-high frequency) stations.

On Oct 24, the FCC voted 3-2 to eliminate the so-called “Main Studio Rule,” which requires local TV and radio broadcasters to maintain studios in the communities where they are licensed.

Advantages to Media Companies

The new set of proposals of the FCC will enable common ownership of a newspaper and a broadcast station in the same market. Moreover, common ownership of two of the top four TV stations in the same market will be allowed subject to regulatory clearance. The old restrictive rule, which so far explicitly prohibited any incumbent from owning more than two TV stations and one radio station in the same market, has now been eliminated by FCC.

Additionally, local broadcasting stations, which have agreements to sell more than 15% of the advertising time of another outlet in the same market, will no longer count these deals in calculating whether they are within national TV ownership limits.

Moody’s Praises FCC Move

Credit rating agency Moody’s Investors Services has stated that the FCC’s relaxation of media ownership rules is credit-positive for TV broadcasters. “Under the revised FCC rules, U.S. television broadcasters will benefit from the ability to consolidate local market ownership through acquisitions and station swaps,” said Jason Cuomo, author of the Moody’s report. As broadcasters will attain economies of scale, this will result in lower costs, greater negotiation power and increased advertising. 

Our Choice

As the market becomes more business friendly for the media companies, we believe investors should choose stocks that promise strong near-term growth and carry a favourable Zacks Rank. Taking into account these factors, we present four such stocks for investors to consider. Each of these stocks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

News Corp. NWSA: Headquartered in New York, NY, the company provides media and information services. It focuses on creating and distributing authoritative and engaging content to consumers. It operates primarily in the United States, Australia and the United Kingdom. News Corp. has long-term (three-five years) EPS (earnings per share) growth estimate of 10% and a dividend yield of 1.32%.

Pearson plc. PSO: Pearson is a global media conglomerate. It publishes books, periodicals, reports and screen-based services for professional communities worldwide, under brand names which include Financial Times, Pitman Publishing and Churchill Livingstone. Pearson has long-term (three-five years) EPS growth estimate of 6% and a dividend yield of 5.55%.

World Wrestling Entertainment Inc.  WWE: Headquartered in Stamford, CT, World Wresting Entertainment is an integrated media and entertainment company, principally engaged in the development, production and marketing of TV programming, pay-per-view programming and live events, and the licensing and sale of branded consumer products featuring World Wrestling Federation brand. The company has long-term (three-five years) EPS growth estimate of 20% and a dividend yield of 1.75%.

IMAX Corp. IMAX: IMAX is a leading global entertainment technology company and is headquartered in Mississauga, Canada. The company emphasizes on film and digital imaging technologies including giant-screen images, 3D presentations, post-production and digital projection. IMAX also designs and manufactures projection and sound systems for giant-screen theaters and is a producer and distributor of films for large-screen theaters. The company has long-term (three-five years) EPS growth estimate of 22.67%.

Chart Looks Attractive

The chart below depicts how strongly all the four above mentioned companies have performed compared with the industry in the past 30 days.

Bottom Line

Relaxation of media ownership rules by the FCC will give the media companies room to stay afloat in the competitive marketplace. Radio and TV broadcasters will now be able to compete more aggressively for advertising dollars with their digital counter parts.

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