Brexit Sell-Off: CBS, Liberty Global, ITV Stocks Among Buying Opportunities, Analysts Say

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"For media stocks, it feels like every crisis is met with selling," says one analyst.

Global stock markets were hit Friday by a broad sell-off following Britain's decision to leave the European Union, which continued Monday in Europe and looked likely to also go on in the U.S. once markets open.

Analysts said the Brexit could hurt the U.K. economy and advertising markets, affecting media and entertainment companies in Britain and U.S. giants with major exposure to international markets.

But some entertainment stocks have sold off more than they should have, providing a buying opportunity, some analysts said on Monday. They cited CBS Corp., John Malone's Liberty Global and ITV as examples.

Jefferies analyst John Janedis on Monday morning before the U.S. market open reiterated his "buy" rating and $62 price target on CBS shares, which dropped 3.8 percent on Friday, more than the broad-based S&P 500 index, to close at $51.65 after going even lower earlier in the trading session.

"Although CBS fell more than the broader market post the Brexit vote, the exposure to the U.K. is modest and [it] has secular tailwinds," he wrote in a report. "Specifically, only 12 percent of CBS’ revenue is derived from outside of the U.S. and half of this is U.S. dollar based. The U.K. is roughly 3 percent-4 percent of revenue and is fully hedged — additionally, much of the U.K. revenue is contractual with modest risk."

And Janedis highlighted: "For the company, the following key drivers are still intact and not affected by Brexit: 1) retrans, 2) Showtime licensing and 3) international syndication."

Malone's international cable operator Liberty Global, which owns British cable firm Virgin Media, among others, saw its Class A stock drop 13.1 percent on Friday, which also led some to argue that the stock was oversold. "Especially Liberty Global should not get hit much on a local currency basis by Brexit," Wunderlich Securities analyst Matthew Harrigan tells The Hollywood Reporter, even though he acknowledges currency translation losses.

Peel Hunt analyst Alex DeGroote also says that more defensive stocks like pay TV firms, including Liberty Global, which aren't driven by advertising revenue and the like, should end up getting more attention and love from investors amid the current Brexit jitters.

U.K. TV giant ITV also got analyst backing after a 20 percent drop on Friday and another 6.1 percent decline as of 12:30 p.m. London time on Monday.

"Nothing has changed with the fundamentals and, even if we did assume an advertising decline of post-Lehman’s proportions, ITV would still look cheap with a very attractive dividend yield," said Liberum Capital analyst Ian Whittaker in a report. "The decline in the share price and the fall in sterling also potentially increases the chances of M&A activity." He reiterated ITV, which he rates a "buy," as his top stock pick.

Whittaker highlighted: "Media buyers had suggested Brexit could have a £70 million impact on the U.K. advertising market, which is circa £20 billion — ITV’s advertising revenues (including online) are just under 10 percent of this, so circa £7 million ($9.4 million) on a pro-rata basis. However, even if we assume a catastrophic situation, ITV still looks cheap." He used an assumption of a 8.7 percent TV ad decline in 2017, compared with a 8.3 percent drop in 2009 following the Lehman Bros. bankruptcy.

Whittaker also touched on the suggestion, first made on Friday, that U.S. entertainment companies could consider a bid for ITV due to the Brexit-related stock and pound drops. "The decline in the exchange rate could heighten chances of a bid," he said. "The pound has fallen 10.5 percent against the U.S. dollar — combined with the decline in ITV’s share price, this increases the chances of a bid by one of the major U.S. media companies where there is historical and present interest in the U.K. market not only from the established media giants, but also from new media/tech companies (for example, we believe that several of the U.S. internet giants explored a bid for the English Premier League rights in the last bidding round)."

Meanwhile, Janedis on Monday also discussed the overall media investor reaction to the Brexit vote. "Though the impact of the Brexit on media is too early to call, the knee-jerk reaction was that ad budgets will be impacted, though in reality, it will likely take a few weeks to know with any degree of certainty," he said.

Added the analyst: "For media stocks, it feels like every crisis is met with selling, and Friday's reaction to the Brexit was no different. On a practical level, we believe revenue exposure to the region for the media companies is less than 20 percent (at the top end), with much of it hedged. However, investors are incrementally worried about macro factors like employment, consumer sentiment, and the impact on ad budgets."

Concluded Janedis: "For now, we do not expect an impact on the upfront, which should finally start to move more quickly this week."

 

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