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Conflicting Signals

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In the first nine months of 2005, Univision's share price declined 9.5 percent. Entravision and Spanish Broadcasting System (SBS), the two other publicly traded Spanish-language broadcasters, fell 8.5 percent and 37.7 percent respectively (see chart, "Hispanic Broadcast Stock Values"). The total market capitalization for the three companies declined an impressive $1.2 billion.

But revenues continue to climb at all three broadcasters.

Philip Remek, media analyst at the brokerage firm Guzman & Co., explains this paradox of rising revenues and falling share prices in terms of investor expectations. In short, the deceleration in ad spending growth, documented by data in the Hispanic Business Media Markets Report, has caught the attention of Wall Street.

"Those stocks all had high-value multiples, high expectations for growth over the long-term and yet it is a cyclical business," says Mr. Remek. "People were expecting much higher growth rates in general out of those three stocks, and that explains the positive [revenue] growth but slumping share price."

"Growth rates aren't as fast as investors thought one to two years ago," says Kit Spring, research analyst at Stifel, Nicolaus & Co. "The main issues are that the supply of Hispanic media is growing. English TV and radio stations are switching to Spanish, so existing players aren't getting all of the upside. Those three companies Univision to a lesser extent are leveraged to businesses that are slowing due to new media, mostly the Internet, but also satellite radio, TiVo, and others."

Univision As Direction Setter
Marla Backer, an analyst with Research Associates/Soleil Securities, sees Univision as the leader that sets the direction for how the other stocks trade. At Univision "there has been top-line growth, but not much bottom-line growth," she says. "There's concern that growth has slowed, and the company may not be able to monetize its recent [television] ratings gains. And even though we have revenue growth, it's still not a cheap stock."

Ms. Backer also puts Spanish-language broadcasting against the background of the U.S. economy. The stock market in general has not performed well in 2005, and media stocks in particular have suffered. "The market goes down, so there's negativity about media stocks," she explains. "Now if Univision were still outperforming the market as expected, investors might say, 'If I want to be in media, I'll move to Univision.' But that's not happening."

Market Shifts Seen on the Street
Mr. Spring attributes the doldrums of traditional media stocks to competition from new media. "All that growth at Yahoo and Google comes out of the hide of publishers or broadcasters," he says. "Among Fortune 500 corporations, the proportion of their ad budgets is shifting from broadcast to online."

Long-term demographics also affect the stocks' popularity. "The [Hispanic] consumer growth is not at all ambiguous; it is very clear. It will last for at least another generation," says Leland Westerfield, an analyst at investment bank Nesbitt Harris, as quoted by The Wall Street Transcript.

However, as the Hispanic audience shifts from Spanish to English, it could erode the broadcast market, especially for the biggest player. "For Univision in this decade, the opportunity is to invest not only in winning over brand marketers to the Hispanic media environment, but also to invest in the programming to bilingual Hispanics," Mr. Westerfield says.

Mr. Remek agrees that language is emerging as a factor for the media. "People who are bilingual will pick and choose media programming," he says.

So far, Univision hasn't moved in the bilingual direction its advertising must appear in Spanish, for example but the company has taken immediate steps to shore up its share price. In February 2005, the company announced a buy-back program of up to $500 million over five years. "So far, across the media landscape, several companies have tried buy-backs," says Mr. Spring. "They seem to have stemmed the fall in stock price but not really stopped it."

Although Univision is open to be acquired CFO Andrew Hobson has publicly invited offers Ms. Backer doesn't see the buy-back as a preparation strategy. "They don't have to buy stock to be acquired because [Chairman] Jerry Perenchio owns most of the voting stock anyway," she observes. "They see this as an opportunity to buy the stock at a discount to where the stock will trade in the future. They expect that with their ratings and revenue gains, the stock will trade higher next year."

Notably, Univision's bittersweet relationship with Mexico's Televisa, its main supplier of telenovelas, took a new twist this year when two Televisa executives resigned from Univision's board and the Mexican company filed a lawsuit charging breach of the programming contract. But Mr. Remek downplays the rift, saying "it's a stormy relationship, but it continues. The future is growth in TV revenues."

Entravision's Fortunes Tied to Univision
Entravision's fortunes depend on those of Univision. Entravision owns or operates 47 Univision affiliate stations in second-tier markets, plus it owns more than 50 radio stations and an extensive billboard inventory. In a recent downgrade of Entravision to "Market Underperform," Mr. Spring notes that the company "is not cheap, and unlikely to escape the negative secular industry trends" in the media business.

In addition, when Univision merged with Hispanic Broadcasting in 2003, federal regulators ordered Univision to reduce its stock holding in Entravision from approximately 30 percent to 15 percent. In July 2005, Univision bought two San Francisco-area radio stations from Entravision in exchange for $90 million in stock. The transaction lowered Univision's holdings to about 20 percent, leaving another 6.2 million shares to sell by March 2006.

"For Entravision it's a big issue," says Mr. Remek. "Univision has so far avoided selling [Entravision] shares in the open market, but there's no guarantee they can accomplish the rest of it that way. That weighs on the share price."

SBS Most Hard Hit
SBS, the smallest of the three publicly traded Spanish-language broadcasters, has suffered the most during 2005. Despite double-digit revenue growth and ownership of top radio stations in New York, Los Angeles, and Miami, its shares have lost almost 40 percent of their value. The highly leveraged company gives Mr. Remek "concerns about cash flow going forward." Mr. Spring sees the stock price languishing, but with little downside risk given the already reduced price.

In December 2004, SBS acquired a station from Viacom in exchange for a 10 percent equity stake in SBS. "I see that as a prelude to further integration between the two," says Mr. Remek. "I think SBS would be an attractive target. The issue would be valuation, and the value has been high."

While 2005 hasn't been kind to media stocks, Mr. Spring sees more trouble ahead. Higher energy costs will cut into discretionary spending. Because Hispanics spend a bigger slice of their income on energy than Anglos, "Hispanic and minority media stocks are most vulnerable to rising energy prices," according to his analysis.

Eventually, Mr. Remek believes online ad spending will be rationalized and investors will adjust their expectations for growth. "Spanish-language media is still a growing pie, and we do anticipate continued growth at rates superior to English-language media," he says, "with the caveat that there will always be more distribution platforms to compete for those ad dollars."

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