Inflated expectations, not fundamental changes, led to an 11.8% drop in share price.
Halloween shouldn’t have been a fright night for Live Nation. The concert promotion-ticketing giant third’s quarter earnings, released after the stock markets closed on Oct. 31, didn’t contain anything that would give investors the chills. Revenue was slightly down and operating profit was up — neither out of the ordinary. But investors still saw enough in the earnings report to get spooked.
Live Nation’s share price fell as much as 8.1% on Nov. 1, wiping out $1.2 billion of the company’s $15.02 billion market value, before ending the day down 6.4% at $66.02. The day’s trading volume was 6.4 times the average for the previous 30 days and the third-highest of 2019, hinting at investors’ jitters. The Halloween scare had enough momentum to carry into the following week. On Nov. 4, Live Nation shares closed down 4% to $62.17, erasing another $720 million of market value and bringing the three-day deficit to $1.78 billion. The price calmed down on Nov. 5 with a 0.35% decline to $61.95 and ended the week at $63.16.
Analysts weren’t swayed by the dip. After the earnings call, Guggenheim reiterated its buy rating and maintained a $84 price target. Northcoast Research’s John Healy lowered the 2020 EPS estimate by $0.05 but left rating and price target unchanged. Jefferies analysts left their estimates “largely unchanged” and their $84 price target untouched. The titles on some analysts’ reports say it all: “Doing What They Do” (Jefferies), “The Show Goes On” (Morgan Stanley) and “No Recession Fear Here” (Evercore). Analysts had expected third-quarter earnings per share of $0.77, according to data compiled by Thomson Reuters. Live Nation had EPS of $0.74. Still, operating income rose 11% as ticketing and sponsorships made up for the concert division’s lower revenue and attendance.
1) Live Nation’s financial performance alone doesn’t merit a $1.8 billion decline in market capitalization, as year-to-date numbers show healthy gains across the board.
2) Inflated expectations help explain why some investors have left the stock. Third-quarter results was a reason to sell and take a profit.
3) The concert business can be uneven from year to year: Live Nation had 30 more stadium concerts in 2018 than this year, but will again have more in 2020.
The way investors set their outlooks comes into play, says Barry Schwartz, chief investment officer at Baskin Wealth Management, a Toronto-based firm with $1 billion under management. “There’s been a trend in the last few months with earnings: If you don’t beat the analysts’ expectations, for whatever that’s worth, you’re getting hammered,” Baskin says. “Because we’ve had such a nice move in the stock market, and of course Live Nation has had an unbelievable move, the bar was set so high.” Another explanation is popular trades are being unwound, said Eric Clark, portfolio manager for Dynamic Brands, an investment fund that focuses on strong brand names. Clark believes investors have become biased against high-value, growing companies in favor of more conservative picks. “For now, not making a profit is a bad word,” he said.
Shareholders can be forgiven for selling and taking some profit. The Oct. 31 closing share price of $70.50 reflected a 44.7% gain in 2019, far outpacing major indices like the S&P 500 and Russell 3000. Until the earnings announcement, Live Nation shares’ appreciation had added $4.5 billion in market value. Investors who held shares since 2018 would have profited handsomely and may have thought Live Nation’s market value had gone far enough. As Morgan Stanley analyst Benjamin Swinburne noted in a Nov. 1 report, “shares are fully valued” given his price target at $75. That said, Swinburne agrees with company executives that 2020 has a “robust pipeline” of concerts and popular artists.
Investors may have been confused about the ebbs and flows off the concert business. Any single quarter doesn’t provide an accurate view of annual trends. In the third quarter, Live Nation had 14.7% more concerts but 4% less concert revenue. (The sponsorship and advertising division, which is driven by the number and type of concerts, was up 26%.) But these metrics shouldn’t have been a surprise. In the second-quarter earnings call, Live Nation had explained it would have 30 fewer stadium shows in 2019 than in 2018. And growth in theater shows would carry a lower average ticket price.
Timing differences make a promoter’s revenue streams uneven from year to year. Artists are on and off the road. Some years have more big concerts and festivals than others. Concerts and festivals might be heavy in the third quarter one year, then heavier in the second quarter the following year. This is what happened to Live Nation this year. The company mentioned the timing change after second quarter earnings and forecast adjusted operating income growth in the mid- to high-single digits; adjusted operating income ended up rising 11%. A similar thing happens in the record business. Hits made for tough year-to-year comparison. A label might have had a great quarter, but sales might be a disappointment if Adele or Taylor Swift released an album in the same quarter a year earlier.
“There’s absolutely nothing you should read into this other than timing,” Live Nation president Joe Berchtold said during the Oct. 31 earnings call. As it turned out, timing differences did indeed cancel out: over nine months, Live Nation had 6% more revenue from 12.9% more shows and 3.3% more fans. As for next year, Berchtold said that Live Nation expects “an uptick” in stadium shows.
The financial results look better with some tweaks. Live Nation’s financial reports use adjusted operating income, simply operating income without expenses and gains that land outside of day-to-day operations. In the quarter, a handful of adjustments bumped adjusted operating income from $111.4 million to $195.2 million, a 3% improvement year-over-year: non-cash charges like depreciation and amortization of assets, acquisition expenses, a gain on an asset disposal, stock based compensation expense, and a $700,000 foreign exchange impact.
While third-quarter revenue was a miss, through three quarters Live Nation has posted a $473 million improvement, more than calendar year’s $450 million increase. Of course, posting equal or similar dollar-value growth will produce a lower growth rate. In this way, year-to-year changes can allow investors to see what they fear the most, a declining growth rate. What’s more, 2018 and 2019 lag far behind gains of $2 billion in 2017 and $1.1 billion in 2016. But Live Nation’s growth figures will improve once it closes the purchase of a majority share in Mexican promoter OCESA (in either the fourth quarter of this year or the first quarter of 2020, the company revealed in the earnings call). Given the deal’s price tag — Televisa reportedly said it sold its 40% stake to Live Nation for $273 million — there is reason to believe OCESA will provide a solid bump.
Investors may be taking into account some risk the U.S. economy will slow in 2020. Warnings of an upcoming recession have been heard throughout the business world by economists, analysts and business leaders. While employment numbers are good, wages are stagnant, manufacturing output has fallen, and businesses have less confidence than consumers. There’s precedent here: Live Nation sales slumped in 2009 due to the Great Recession — though it rebounded the following year. But a 2020 recession wouldn’t necessarily impact concert attendance. David Karnosky from JP Morgan asked about the company’s exposure to recession risk, to which Berchtold replied that globalization will provide “structural tailwinds” for Live Nation’s international businesses (OCESA will help). CEO Michael Rapino insisted there has been “strong demand” at on-sales for future concerts and there is “no weakness at all in terms of consumers buying tickets.”
Both Schwartz and Clark used the price dip as a buying opportunity.
Clark likes Live Nation’s international potential: “To me, you take advantage of some of those silly movements, particularly because growth is a bad word and you get to buy some favorites on sale.”
Schwartz believes as long as people are employed, they’re going to want experiences like concerts: “For long-term shareholders, I didn’t see anything in there that would have gotten me to change my thesis and our rationale for holding the stock. In fact, some of the moves they made, the acquisition of Groot Hospitality, even though it isn’t needle-moving, it’s positive in terms of how Live Nation is thinking of the next phase of their growth.”