Hollywood Stocks Open 2016 Lower Amid Wall Street Sell-Off

AP Photo/Reed Saxon

Stock declines in China set the stage for drops on markets around the world as Netflix and DreamWorks Animation shares are hit harder after downgrades.

U.S. stocks dropped sharply in early Monday trading following a big decline in Chinese shares overnight as U.S. entertainment industry names had a weaker start to the year, with Netflix and DreamWorks Animation among the big decliners after analysts downgraded their respective stocks.

Trading on mainland China's stock markets was suspended on Monday, as a weakening currency and signs of weaker economic growth spooked investors, leading to a big sell-off, including in entertainment industry stocks. The malaise also hit other markets in Asia, including Japan, and later Europe, followed by the U.S.

Investor confidence in China, the world’s second-largest economy, has been rattled since last year, which saw several big single-day declines.

Right from the 9:30 a.m. EST U.S. market start, big stock indices fell. The broad-based S&P 500, which ended 2015 down slightly, was down 2.0 percent as of 10 a.m. EST, and the Dow Jones Industrial Average was down 2.2 percent.

Most Hollywood stocks recovered a bit after sharper initial drops. Among big entertainment conglomerates, shares of Walt Disney at that time were down 2.3 percent after a bigger decline at the start of the trading session, 21st Century Fox's stock was down 2.1 percent, and shares of NBCUniversal owner Comcast were down 1.5 percent. 

Viacom's stock was down 1.4 percent, Time Warner was down 1.2 percent and CBS Corp. shares were down 1.0 percent.

Lionsgate shares were down 4.5 percent after initially holding up better, Starz's were down 1.4 percent and AMC Networks' down 2.4 percent.

The stock of DreamWorks Animation was down 6.6 percent as of 10 a.m., after B. Riley analyst Eric Wold on Monday downgraded it to "neutral," saying that its valuation "reflects optimistic Kung Fu Panda 3" projections. 

Netflix, the biggest gainer in the S&P 500 in 2015 and the strongest performer of the year among entertainment and entertainment-related stocks, was down more than 7 percent after Robert W. Baird lowered its price target to $115, citing weaker U.S. subscriber results in the last two quarters and expectations for a better-than-expected fourth-quarter earnings report in January.

Among European entertainment stocks, U.K. broadcaster ITV and pan-European pay TV giant Sky were down 2.1 percent each in London trading as of early afternoon local time. German TV networks group ProSiebenSat.1's stock was down 1.4 percent, and shares of France's Vivendi fell 3.1 percent.

Guggenheim Partners analyst Michael Morris on Monday said in a report that big media and entertainment stocks kick off 2016 "with the same overhangs faced a year ago, albeit at an astoundingly different relative valuation." He said that one-year forward price-to-earnings stock multiples for his content stocks coverage universe have contracted "from a 5 percent premium to the S&P 500 on 12/31/14 to a 24 percent discount on 12/31/15, even as revenue growth outpaced the market in 2015."

Concerns have been "driven by several consumer behavior changes, most notably time-shifted and over-the-top video consumption," he said.

"We continue to see the same challenges for media companies persisting in 2016 without convincing steps toward meeting changing customer habits," concluded Morris. "We see content aggregators that can build direct retail relationships with consumers as better positioned for long-term growth. "We remain more optimistic toward TV (and associated digital) advertising trends in the coming year, and more cautious toward subscriber and affiliate fee trends. We prefer companies with lower relative levels of exposure to the traditional bundle, which we expect will provide more flexibility to pursue consumer opportunities in the coming years. AMC Networks and CBS are best positioned in this regard."

His "greatest caution" is toward companies with "heavy sports rights agreements, high relative fees and modest contractual protections," the analyst said. "We see sports content as resilient in its advertising revenue potential, but as easily separately identifiable in the establishment of lower-cost offerings (either by new entrants or incumbent pay-TV providers). We see Disney and MSG Networks as most at risk in this regard."

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