Nomura Downgrades Entertainment Industry to 'Neutral'

5:45 AM PST 11/14/2011 by Georg Szalai
Stan Honda/AFP/Getty Images

Analyst Michael Nathanson also downgrades CBS Corp. and mentions concerns about ad trends and digital content deals as he argues that "the sector’s positive earnings revisions are set to slow in 2012."

NEW YORK - Analyst Michael Nathanson of Nomura Securities downgraded his view on the U.S. media and entertainment sector from "bullish" to "neutral" on Monday saying "we believe that the sector’s positive earnings revisions are set to slow in 2012."

He also downgraded his rating on CBS Corp.'s stock from "buy" to "neutral," arguing that 2013 earnings "are set to decelerate sharply post highly anticipated strong 2012 results."

But despite the downgrades, Nathanson emphasized: "Having defended media fundamentals over the past year, our downgrade of the group and CBS is not rooted in the belief that industry drivers are about to fall off a cliff. Rather, we think that the upside earnings surprises that drove CBS and the broader sector are going to be less likely in the year ahead."

Nathanson still recommends shares of Walt Disney, News Corp, and Viacom as "buys" in the entertainment sector.

"We believe that Disney and News Corp. have the best earnings per share revision potential in the group due to the benefit of near-term and widespread affiliate and retrans/reverse negotiations, strong cable content franchises, and the potential for further capital return plans," he wrote. "Viacom is now simply a value play on a massive equity shrink."

Among factors negatively affecting his entertainment industry outlook are U.S. advertising trends, which the analyst said "have been decelerating over 2011 and came in below forecast for the second quarter in a row." He said he was "worried that national scatter trends, a major source of upside, have cooled and will become even more challenging in the first quarter."

Nathanson also said some cable networks groups with ratings challenges will face increased programming and marketing costs, and smaller cable networks owners will have more contentious relationships with distributors.

Plus, while big entertainment companies have "widely embraced" stock buybacks, which boost earnings per share and investor confidence, investors are now mostly including them in their evaluation of stocks. "After decades of capital destruction, we applaud these [buyback] actions," said Nathanson. "However, they are now factored in to most forward earnings estimates."

Nathanson even mentioned digital platforms, such as Netflix and Amazon, highlighting that for the second quarter in a row they have driven earnings upside surprises at Hollywood conglomerates. "While we are in early days, we worry that the market is starting to see these deals 'as having your cake and eating it, too'," he wrote. "We are concerned that the scope for more near-term digital dollars is limited, the increase in Web options may cannibalize some level of viewing and that traditional syndicated TV buyers will be less interested in library content going forward."

Email: Georg.Szalai@thr.com

Twitter: @georgszalai

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