Univision under cloud as questions over ad sales cause drop in share price.

Rising competition and fears about a new system for measuring television audiences have placed a cloud over Univision Communications Inc. shares, as investors have begun to question future ad spending at the Los Angeles-based Spanish-media giant.

Shares in Spanish-language Univision have declined nearly 25 percent since hitting a 52-week high of $40.05 in early January.

From the beginning of the year to July 13, the stock was down 22.8 percent, to $30.63. By comparison, the Bloomberg Broadcasting & Cable Stock Index, which includes a range of major media companies, was down 1.1 percent.

Fallout from the planned introduction of "people meters" in the Los Angeles market has been such a problem for Univision that it sued Nielsen Media Research last month seeking to block the July 8 rollout. Nielsen eventually plans a nationwide rollout of the people meters--electronic versions of its venerable TV ratings service.

Univision has argued that the new system would undercount Spanish-language viewership by as much as 50 percent, thereby eroding the base oil which ad spending is built.

But a Los Angeles Superior Court judge rejected Univision's motion for a temporary restraining order, ruling that the broadcaster had failed to make a convincing argument that it would prevail at trial.

The other big factor pressuring Univision has been increased competition from Telemundo, its chief rival in the Spanish-language television market.

Telemundo, which was purchased by General Electric Co. in 2001 and is the second-largest Spanish-language network in the United States, made strong gains in the February sweeps period while its larger rival lost market share.

Univision took back some viewers during the May sweeps--but apparently not enough to give buoyancy to the stock, said David Bank, media analyst with RBC Capital Markets in New York. He views the competition with Telemundo as Univision's biggest emerging problem.

"GE is beginning to focus on Telemundo as a growth engine in NBC for its overall network," be said. "'With that focus, Telemundo may begin to aggressively attack the Univision franchise."

(Univision officials didn't return calls.)

All this has led to a bearish aura surrounding the stock.

Short sellers, who sell borrowed shares in a bet the price of a stock will tumble in value, have been targeting Univision for more than a year.

The company is among the 50 most heavily shorted stocks on the New York Stock Exchange as the stock has fallen recently some shares sold short have been "covered," as short sellers collected on winning bets.

As of June 7, 22.73 million shares, or 11 percent of the company's float of 207 million outstanding shares, were sold short. That's down from 30.4 million shorted the prior month, according to data provided by the NYSE.

At an average daily volume of 1.3 million shares traded, it would still take 17 trading clays--more than three weeks of buying--to eliminate the current short interest.

Besides the short interest factor, Wall Street in general has tapered off in its enthusiasm for the stock.

"Analysts seem to be cooling to the company's shares over the past six months," said Mitch Zacks, vice president Zacks Investment Research, the Chicago-based money-management and research firm that tracks analysts' recommendations.

Last December, six analysts recommended strong buys on Univision, three had buy recommendations and five rated it a hold. Now, five analysts are recommending strong buys, one rates it a buy and eight hold.

"Three analysts went from positive on the stock to neutral. This suggests to me that this has to do with the advertising market," Zacks said. "Investors bid up a media company's stock early in the economic cycle, and sell later when the economy improves."

Bargain stock?

From a technical standpoint, the short covering and negative sentiment could signal a buying opportunity based on the stock's valuation.

David Hines, president of Avalon Research Group Inc., a Boca Raton, Fla.-based research firm that searches out undervalued and overvalued securities, pointed out that the number of days to cover the short position held in Univision has dropped from 40 days in June 2003 to 16.5 days currently.

"The negatives may already be factored into the stock," Hines said. "I'm usually very bearish, and I look for holes in the data. But here it looks like the shorts are covering."

David Miller, an analyst with Sanders Morris Harris in Los Angeles, sees the stock drop as a buying opportunity. That's because the fundamentals of the company remain strong, and the May rebound in ratings from February.

"Our bet is that it won't be long before the shorts start to cover when they begin to realize the spending and buyer power of the overall Hispanic household," Miller said.

With such a large number of shares sold short, a sudden jump in the stock price--spurred, for instance, with surprisingly good earnings or ratings figures--could force short-sellers to begin buying the stock so their losses don't multiply. This so-called "short squeeze" can drive up the price of the stock rapidly.

Univision is the most watched Spanish-language network, attracting 3.14 million viewers in prime time, according to Nielsen Media Research. Telemundo averages about 957,000 viewers, followed by TeleFutura (a Univision sister network) with about 653,000.

Univision Communications Inc.

Stock Prices

YEAR (Dec. 31)                   2003    2002

Revenue (billions)              $1.31   $1.09
Operating Expenses (millions)   966.4   838.2
Operating Income (millions)     344.6   253.1
Net Income (millions)           155.4    86.5
Earnings Per Share              $0.55   $0.34

Quarterly Net Income (millions)

SUMMARY

Business: Spanish-language media company

Headquarters: Los Angeles

CEO: A. Jerrold Perenchio

Market Cap: $9.85 billion Dividend Yield: None

Total Liabilities: $2.9 billion P/E Ratio: 53

Long-Term Debt: $1.43 billion