Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Paul Boyne, manager of the Invesco Perpetual Global Equity Fund.
The period since the dotcom crash of the early 2000s has seen a change in the fortunes of the technology, media and telecoms (TMT) sectors. Telecoms have become quasi-utilities, wrestling with the competing demands of regulators, the need to invest capital and the cost control required to deliver returns that can maintain shareholders’ interest.
The technology sector has retained its growth label, but the fortunes of individual firms have varied dramatically. Household names in 2001, such as Motorola and Nokia, have struggled to keep pace, while the likes of Apple, Samsung and Huawei have come to the forefront – at least for now. The media sector sits somewhere in the middle, offering exposure to high-growth segments of the economy, while providing income-focused investors with access to strong and sustainable cash flows.
A quick look at what’s known as the ‘beta’ (a measure of risk) of the global media sector illustrates the change this sector has undergone. This measure captures the sensitivity of the sector’s returns to those of the wider market. As the late 1990s bubble took hold, media was at its heart, rising (almost exclusively) by 30% more than the benchmark MSCI World Index. The sector was effectively a geared play on a rising market (and latterly on a collapsing one).
So what has changed in the years since the bursting of the dotcom bubble? The most important changes have been the cash and debt dynamics of the sector. Comparing beta and net debt (debt minus cash) reveals a clear relationship. Both the sector’s risk and debt levels peaked as the bubble burst and have tracked each other at a lower level since.
This confirms most people’s expectations that the collapse of the huge TMT bubble led to the reassessment of business models, a process of deleveraging (shedding debt) and a renewed focus on cash flow. Healthier balance sheets have been generated since then by renewed business models that have generated attractive and sustainable levels of free cash flow.
I believe these characteristics have taken media from being a high beta (ie, high-risk) sector with a free cash-flow yield (see page 36) approaching zero, to one that’s financially healthy, generates sustainable free cash flow and offers an attractive free cash-flow yield.
Media companies can now be clearly separated into infrastructure, media and content media. On the infrastructure side we hold stocks such as SES (LX: SESG), a global satellite company; Time Warner Cable (US: TWC), an American cable company; and BSkyB (LN: BSY).
These three companies have a number of common attributes, one of which is falling capital expenditure (capex) leading to higher free cash flow. That’s why management has committed to return a significant amount of free cash flow to shareholders. The high level of capital required to participate in this space also acts as a useful barrier to entry to rivals.
On the content side, we’ve invested in Viacom (US: VIA), which includes MTV and Nickleodeon, and Time Warner Inc (US: TWX), which includes Warner Bros, HBO and CNN. They’ve built up big barriers to entry through scale. In contrast with only five years ago, they’re committed to returning a decent amount of cash to shareholders.