Bankruptcy Scores: 10 Risky Media Stocks

NEW YORK ( TheStreet) -- The media sector is riddled with risk.

Highly dependent on advertising revenue, the industry has been attempting to figure out how to compete in a world where content is increasingly being accessed online. This has put pressure on most of the stocks and raised fears of Chapter 11 filings.

One way to test if a company poses any threat of filing for bankruptcy is through the Altman Z-Score, a formula developed by New York University professor Edward Altman in 1968. The Altman Z-Score measures several aspects of a company's financial health to forecast the probability of it going bankrupt within two years. Since its inception, the formula has been 72% accurate in predicting corporate bankruptcies two years prior to the filing.

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On a general basis, companies with a Z-Score higher than 3 are considered safe, while those with a score of 1.8 or lower are considered distressed. Anything in between is a grey area.

While the formula, of course, isn't the only indicator of the financial health -- and is by no means a guaranteed barometer of a company's bankruptcy risk -- it is a metric worth considering for those media companies that fall below the safety zone. A year-over-year decline in Z-Score may also raise a red flag.

While a significant number of media companies examined by TheStreet had a Z-Score under 3, the good news is many of the riskiest stocks are showing improvement over last year.

Using this metric, TheStreet looked at media companies with a market cap of at least 1 billion and average daily volume of more than 2 million to see which are at the greatest risk of filing for Chapter 11.

Here's a look at media companies with a Z-Score of 1.8 and below for the trailing 12 months, as compiled by I-Metrix.

10. TiVo

Altman Z-Score TTM (Trailing Twelve Months): 1.85

Altman Z-Score 2010: 2.34

TiVo ( TIVO) is in threat of extinction and its shrinking Altman Z-Score is a clear reflection of this risk.

The DVR pioneer is having a difficult time finding a place in a world where more couch potatoes are moving online for content.

The company recently introduced its TiVo Premiere Elite, a $499 box that allows users to record four different shows while they watch a fifth. Storage has been increased to two terabytes, which gives enough space to save 300 hours of hi-def television.

But the new box is being criticized as being out of touch with consumers who don't necessarily need to tape four shows at a time since so much content is available on demand and on sites like Netflix ( NFLX) and Hulu ( HULU).

Another obstacle for TiVo is cable and satellite companies are adding their own DVR functions to their set-top boxes, making TiVo unnecessary for their subscribers.

TiVo may have posted better-than-expected second-quarter results, but it still reported yet another loss. The company continues to shed subscribers, losing 33,000 users during the period to end July with 1.93 million subscribers. This compares with 2.4 million a year earlier.

"We believe it will benefit from rising IPTV Internet Protocol Television competition that will lead to more MSOs multiple system operators to quickly seek next generation interface technology on a cost-effective manner," Janney Capital Markets analyst Tony Wible wrote in a recent note. "The rapid pace of change in the MSO landscape should hasten deals in the U.S. and international markets. Furthermore, TiVo's legal victories enhance its ability to monetize its IP, which the massive cash balance provides downside support and reinvestment opportunities."

9. Regal Entertainment

Altman Z-Score TTM: 1.64

Altman Z-Score 2010: 1.59

Regal Entertainment ( RGC) has been able to remain afloat because of its ability to control costs.

"Regal has not shown the ability to grow both attendance and ticket prices simultaneously in recent quarters, but has shown spending discipline," Wedbush analyst Michael Pachter wrote in a recent note.

The movie theater operator's commitment to digital is also a positive, as it plans to convert screens to 3D and IMAX, which should positively impact sales and margins. Its goal is to be fully digital by mid-to-late 2012.

Regal is committed to returning capital in the form of a dividend to shareholders. "We see this and an encouraging sign that the business is sufficiently predictable and controllable to cover debt services and dividends," Pachter wrote.

But box office trends in the U.S. remain weak and year-over-year ticket prices are flat.

"The lingering uncertainty around 3D attendance mix, debt markets and the early Video on Demand window will likely weigh on the stock and leave the name more dependent on USBO U.S. box office performance, which we believe will be under pressure in the near term," said analyst Tony Wible of Janney Montgomery Scott in a note.

The biggest concern is the potential for compression of the DVD release window. Wedbush's Pachter believes the studios will shrink the DVD window to about 90 days from a range of 120 to 150 days.

"While we don't see this threat as imminent, we think it is inevitable, and we think that a shortened DVD window would have a greater impact on theatrical exhibition revenues, limiting future growth," Pachter wrote.

"The company continues to be one of the most leveraged operators in the group...We believe names with higher leverage could face more risk if conditions in the debt market deteriorate," Janney's Wible, who has a sell rating on the stock, notes.

8. New York Times

Altman Z-Score TTM: 1.55

Altman Z-Score 2010: 1.83

New York Times ( NYT) has been struggling with falling advertising revenue.

The company reported a loss in its most recent quarter, hurt by a write down of the value of several regional newspapers. Excluding this adjustment, New York Times earned 14 cents per share, ahead of estimates. Revenue declined 2% to $577 million, shy of Wall Street's forecast of $581 million.

To combat the decline in traditional advertising, its largest source of revenue, The Times instituted a paywall for its online content in March. For those who don't already subscribe, it now costs between $15 and $35 every four weeks to access content.

In the past, newspapers have shied away from charging readers for online content for the fear of losing traffic, and as a result, advertising click throughs.

Following the paywall, The Times' digital subscriptions reached about 224,000 by the end of the second quarter, more than the 200,000 analysts expected. But the increase in online subscriptions and digital revenue clearly were not yet enough to offset declines in print advertising.

Billionaire investor Carlos Slim upped his stake in the company to 7.3% from 6.9% in last month, shortly after the company repaid the $250 million it owed Slim more than three years before its due date.

7. Time Warner Cable

Altman Z-Score TTM: 1.04

Altman Z-Score 2010: 0.99

As more consumers watch video on the Internet, traditional cable providers like Time Warner Cable ( TWC) are searching for new channels of distribution.

Time Warner Cable has been attempting to capitalize on "TV everywhere" with the slingbox -- a set-top box that allows users to watch video anywhere via multiple devices. The box will only be available to Time Warner Cable's wideband subscribers who pay $99 per month. The company will provide a full rebate of $300 for purchasing the slingbox.

Subscribers can hook up the slingbox to their cable box, which will allow them to access their TV remote control and watch cable programming.

The company has also been promoting its fast broadband service. Time Warner Cable has been able charge a higher fee for this faster service, as consumers look to stream and download content quickly and seamlessly.

During the second quarter, Time Warner Cable added 54,000 residential broadband customers and high-speed data revenue is growing more quickly, even as the company continues to lose TV subscribers. Last quarter, Time Warner Cable lost 124,000 residential video subscribers, bringing its total down to 9.7 million from 12.1 million.

But cable television is still Time Warner Cable's biggest revenue generator, accounting for 56% of the company's $4.9 billion in sales in the second quarter.

The company, which was spun off from parent, Time Warner, in March 2009, provides high-speed data and voice services to about 14.5 million residential and business customers in New York, the Carolinas, Ohio, Southern California and Texas.

Last month, the company announced a deal to buy Insight Communications, a cable operator controlled by private equity firm Carlyle Group. The deal will add 700,000 TV subscribers and 540,000 data subscribers to Time Warner Cable.

6. Cablevision

Altman Z-Score TTM: 0.72

Altman Z-Score 2010: 0.48

Cablevision ( CVC) is very much in the danger zone, as its continuous loss of video subscribers weighs on earnings.

The fifth largest cable provider missed estimates in the second quarter and ended June with 3.3 million subscribers, as 23,000 customers defected. And the company added just 5,000 broadband subscribers during the three-month period, the lowest number in at least three years.

Like the other cable providers, Cablevision is working with programmers to give customers access to TV shows on mobile devices outside the living room.

Cablevision announced that it has struck a deal with Times Warner this week that will allow its subscribers to watch Turner Network programming, which include CNN, TNT and Cartoon Network, on Internet-enabled devices like the iPad and smartphones.

Cablevision spun off its AMC ( AMC) division in July, which gave shareholders one AMC share for every four Cablevision shares. Since the spin-off, Cablevision's stock has underperformed, falling 54%.

Barclays Capital issued a note saying Cablevision's challenges, like competition from Verizon ( VZ), are already priced into the stock.

5. Liberty Global

Altman Z-Score TTM: 0.49

Altman Z-Score 2010: 0.30

Liberty Global ( LBTYA), the cable company controlled by billionaire John Malone, continues to suffer setbacks amid its ongoing restructuring.

Liberty Global, which is a leading cable operator in Europe, Latin America, and Australia, has reorganized its operations over the last several years, making acquisitions and divesting other assets.

Earlier in the month, the company received approval to purchase Aster Sp. z.o.o. for $805 million on the condition that it sells parts of the network that overlap in Warsaw and Krakow. In the two cities combined, Liberty would have a market share of between 50% and 60%. It would have to reduce this share to no more than 40%.

In March, the company won an auction to purchase Kabel BW, the third largest cable operator in Germany, for about $4.5 billion. The deal was expected to close in the second half of the year, subject to regulatory review. But European regulators decided to bring the case to the German antitrust authority who have postponed a decision regarding the deal until November 2011.

Liberty Global previously purchased UnityMedia, the second largest cable operator in Germany, in January 2010. Germany's cable market is lucrative, and if Liberty Global gains regulatory approval for the Kabel BW deal, it will become the largest cable company in the market in terms of revenue.

In July, the company divested its Australian operations for $2.1 billion.

Liberty Global cut its loss in half in the second quarter, as revenue grew and it added new customers. The company said it had 17.6 million customers in 14 countries as of June 30, down 0.9 % from a year earlier. Still, it posted a 3.4% increase in customers with two or more services, and a 16% increase in subscribers with three services.

4. Virgin Media

Altman Z-Score TTM: 0.37

Altman Z-Score 2010: 0.21

British cable company, Virgin Media ( VMED), is shifting its focus from content distribution deals to broadband.

The company finally exited from content ownership with the sale of its stake in UKTV last month. Scripps Network purchased Virgin's 50% stake in the unit for $390 million.

In the second quarter, Virgin Media lost 36,000 customers bringing its total to 4.8 million. But those customers who remained with Virgin spend more. The company, which boasts Britain's fastest broadband connection, has been pushing to sell more of its telecom and television services to each customer to offset the decline in subscribers.

Virgin Media competes with telecoms provider BT and satellite broadcaster BSkyB to supply broadband, broadcast and on-demand TV and mobile and home telephone service.

Virgin plans to offer broadband speeds of 100 megabits per second by mid-2012 to all homes in its network.

3. CBS

Altman TTM: 0.02

Altman Z-Score 2010: -0.36

CBS' ( CBS) Altman Z-Score returned to positive territory, benefiting recently from new streaming content deals.

The media conglomerate's profit more than doubled in its second quarter, lifted by its partnership with Netflix, where it rakes in new money for old shows. The earnings exceeded analyst forecasts as revenue grew by 8%, driven by a 21% surge in content licensing and distribution.

The company also recently struck a similar deal with Amazon ( AMZN), which should give it another boost in the third quarter.

CBS is leading the industry in selling content to online video distributors, which have a higher margin rate. An added perk is that none of the content CBS is offering to distributors is currently on the air, which should help mitigate cannibalization.

2. Time Warner

Altman Z-Score TTM: -0.59

Altman Z-Score 2010: -0.67

Time Warner ( TWX) is hoping to profit by licensing its treasure chest of TV shows to online content providers, as it skates on thin ice with a Z-Score of negative 0.59.

Barclays upgraded the company to overweight from neutral earlier in the month, citing the value of Time Warner's Warner Bros. content. The firm also raised its price target on the stock to $38 from $36.

With Netflix likely focusing more on acquiring television content as the cost of licensing movies increases, it should benefit Warner Bros., Barclays' analyst Anthony DiClemente noted. If Warner Bros. licensed 5,000 of its shows, Time Warner could add $250 million in revenue, or 10 cents per share in profit, DiClemente estimates.

Time Warner generates less of its revenue from advertising than some of its rivals, which should help insulate it from an economic downturn.

In the second quarter, the company recorded its fastest revenue growth since the third quarter of 2007, when it still owned AOL ( AOL) and Time Warner Cable.

But the media giant issued a conservative profit outlook, sending a fresh round of fears through Wall Street. The company sees full-year earnings growing in the low teens on a percentage basis but analysts had expected earnings to increase by 14.5% in 2011 to $2.76 per share.

1. Sirius XM

Altman Z-Score TTM: -0.88

Altman Z-Score 2010: -1.25

Sirius XM ( SIRI) is the most likely company to file for bankruptcy within the group, with an Altman Z-Score of negative 0.88. But the satellite radio company has made some big strides from its negative 1.25 score in 2010.

Shares of Sirius have surged 61% over the past year and it is in a better position today than it was in September 2010. The company has had a strong first half of the year, reporting positive earnings and raising its guidance twice.

Sirius now foresees 1.6 million net subscriber additions this year, exceeding its previous goal of 1.4 million. The company boasted 21 million subscribers at the end of last quarter.

Management also expects free cash flow to approach $400 million, up from prior guidance of $300 million.

In 2012, the company is calling for a 10% rise in revenue to $3.3 billion with adjusted EBITDA growth of 20% to $860 million and free cash flow growth of 75% to $700 million.

Sirius XM will also embark on its first price hike on its base subscription rate since 2001 in January 2012. Its base subscription will go from $12.95 to $14.49 per month. It will also adjust prices on some of its other packages.

The company had agreed to voluntarily freeze its basic prices for three years following its merger in July 2008.

Still Sirius relies heavily on the auto industry to attract new subscribers. The company has ties with major automobile makers like Ford and Toyota. Sirius has radios in the dashboards of 65% of new cars in the United States, and the radios can also now be found in used cars.

According to studies, nearly half of the car owners who receive free radios in their new vehicles end up paying for the service once the promotion expires.

But any downturn in the economy, which will likely pressure the auto sector, could also have a disastrous effect on Sirius XM.

>>To see these stocks in action, visit the 10 Risky Media Stocks portfolio on Stockpickr.

- Reported by Jeanine Poggi in New York.

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