Analyst Recommends Hollywood Conglomerate Stocks to Longer-Term Investors
NEW YORK - What should media and entertainment investors do after recent declines in the stocks of Hollywood conglomerates? (link to last night's story) Nomura analyst Michael Nathanson said Wednesday that people with a one-year investment time frame should buy sector stocks. "
With the market now down 17 percent off of its early July highs and some media stocks having multiple compression in excess of 25 percent, we strongly believe that the risk/reward for investors with a one-year time frame favors buying many of these names at current levels," he wrote in a report entitled "Throwing Out the Old Playbook. Finding Value in a Rocky Economy."
Nathanson said his sector view is still "bullish," even though he lowered his target prices on big entertainment stocks after recent market turmoil. He cut his target on CBS Corp.'s stock from $28 to $24, on Walt Disney from $42 to $38, News Corp. from $19 to $18, Time Warner from $36 to $33, Viacom from $51 to $50, cable networks firm Scripps Networks from $48 to $40 and Discovery Communications from $42 to $37.
Nathanson rates CBS Corp., Disney, News Corp. and Viacom at "buy," while he has a "neutral" rating on Time Warner, Scripps and Discovery. Disney and Viacom are among the stocks with the most upside, he suggested.
"At current levels, we believe that the risk/reward of Disney and Viacom are incredibly compelling, with valuations approaching trough levels on bear case assumptions," Nathanson wrote. "For CBS, where ad exposure and earnings risk is higher, the upside to our base case valuation is twice as high as the downside to the bear case level."
Nathanson also had an explanation for why Hollywood conglomerates declined so strongly during the third quarter, even though U.S. advertising trends have held up well. "Rather than wait for confirmation that advertising demand is collapsing into a U.S. recession, the market has sold media stocks first and asked questions second," Nathanson said, arguing that this behavior was "no doubt learned in hindsight over the 2008/09 time frame" when the last recession caused damage.
He also acknowledged that near-term media stock valuations "might collapse even further than we anticipate in the downside scenario." Still, the analyst concluded that "the risk of negative advertising estimate revisions is much more modest now than in the fall of 2008."
Email: Georg.Szalai@thr.com Twitter: @georgszalai