WGA Talks: What Wall Street Is Saying Ahead of a Possible Strike
The labor situation, together with other factors, has recently been "weighing on" sector stocks, but concern about the impact on sector giants' earnings "are overblown," analysts say.
The Monday night expiration of Hollywood studios' current contract with the WGA comes as Hollywood conglomerates are gearing up for their quarterly earnings reports, and Wall Street analysts say a potential strike has as of late affected the stocks of sector companies.
"The combination of the very high likelihood of a writers strike, a mixed ad outlook and weak ratings have been weighing on the stocks recently," Jefferies analyst John Janedis wrote in a research report last week.
While it is difficult to estimate how big an impact various factors have on stock prices, there have been signs that investors have asked questions and that analysts are also paying attention. Janedis and MoffettNathanson analyst Michael Nathanson last week held separate expert conference calls for investors to shed light on the possible strike and its fallout. (The former featured THR's Jonathan Handel.)
And Guggenheim Securities analyst Michael Morris said in a report last week: "In the past several days, investor concern toward advertising trends — following lower-than-consensus estimated domestic ad agency growth — and the potential of a writers strike have moved to the forefront and have likely been key contributors to weakness" of entertainment stocks.
What is the likely fallout in case of a strike? "Wall Street is not likely to have a noticeable reaction to [a] strike unless it drags on for more than a month," Hal Vogel, CEO of Vogel Capital Management and a former entertainment industry analyst, tells THR. He expects "no immediate effect on stock prices of broadcasters and cable nets and film companies" in case of a decision to strike, arguing that "their long-term sources of earnings extend way beyond [the] loss of a few weeks of scripts."
Morris also told investors in a note that "we do not anticipate a sustained valuation impact if a strike does occur as we believe both sides are motivated to reach a resolution."
He added: "The near-term impact of a strike (higher network margins, loss of late-night writing, some shift to greater on-demand viewing) does not change our estimate of media company values. We see an extended strike as painful for WGA members, and disruptive to studios and the local economy and believe both sides are incentivized to reach (what we anticipate will be a valuation neutral) compromise."
Wunderlich Securities analyst Matthew Harrigan said a possible strike "clearly most affects those with assets concentrated among networks dependent on scripted programming," while the likes of Walt Disney and Comcast/NBCUniversal are "more diversified, less exposed."
And CFRA Research analyst Tuna Amobi tells THR: "If history is any guide, we expect the initial impact on entertainment stocks to be relatively muted, but this assessment could change if a near-term resolution proves elusive and a resulting strike drags on for a longer-than-expected duration."
He added about the risk of a longer-term labor disruption: "Broadcast TV networks with more exposure to scripted TV programming could be vulnerable during the upcoming 2017-2018 season; such uncertainties could also cause some advertisers to reduce their allocation of TV spending at this year’s upfront, perhaps shifting a bit more to digital ads."
And Amobi said: "The major film studios tend to have a longer development pipeline, although some collateral damage is also conceivable, including some high-profile franchise sequels, as reminiscent of the last strike. Under such scenarios, streaming providers with large on-demand libraries, e.g. Netflix, could benefit from further shifts to on-demand viewing, and some cable networks could also marginally benefit from programming reruns."
Vogel also sees streaming video giants as possible winners in case of an extended labor dispute. "Netflix, Hulu, Amazon will benefit if it goes long, but it is hard to see how already stretched high valuations will be further stretched by a strike," he tells THR.
Morgan Stanley's Benjamin Swinburne on Friday echoed his fellow analysts' stance, writing in a report: "We believe concerns of the impact of a potential WGA strike on media earnings power are overblown."
Looking at what a potential writers strike would mean for CBS Corp. specifically, he said that "the impact would depend on the length of the strike and ultimately be a temporary rather than recurring impact to earnings."
He added: "For CBS specifically, late-night talk shows, The Late Show With Stephen Colbert and The Late Late Show With James Corden, as well as the daytime show The Talk, are likely impacted immediately in that they have daily writers and would revert to re-runs."
What are the possible implications for the fall TV schedule? "Our understanding is that writers generally start writing for the fall in the second half of June, which implies that even if the strike were to start, there are still 30-45 days to potentially find a solution," said Swinburne. "Otherwise some scripted series scheduled for the fall could be delayed."
B. Riley analyst Eric Wold, who covers the stocks of Lionsgate and film exhibitors such as Regal Entertainment, AMC Entertainment, Cinemark and Imax, said he sees "minimal implications" for those companies, given that "most of the issues at hand here relate to the TV space where the industry has witnessed a significant jump in the number of TV shows produced in recent years to meet the demand of the emerging OTT offerings looking for new product."
For exhibitors, he said, "we would not expect any impacts to 2017 outlooks and only minimal potential impacts to 2018-plus should a lengthened strike lead to schedule delays in any films that are not yet in post-production – as studios are typically working with screenplays that have already been written and tweaks can be made without necessarily using a writer."
Wold's tip for investors: "Should there be any impact to the stocks within our coverage universe on adverse news flow in the coming days/weeks, we would use any weakness to add to positions."
The analyst mentioned two stocks he covers that are somewhat more exposed to a possible writers' strike. "Within our coverage universe, we could see minimal impact on the outlook for Lionsgate that derives 20 percent-25 percent of its projected revenues from the TV production segment," he said. "However, with a good number of those revenues generated from the studio’s library, syndication on prior seasons onto other platforms, as well as full season deliveries to the OTT providers (all at once for “binging” as opposed to one per week), most the of the near-term visibility into deliveries/revenues is locked in, and we would only expect modest impact next year on delays should a strike linger."
Imax is the second stock he spent a bit more time on discussing, given the potential impact on its planned cinema release of the first two episodes of ABC series The Inhumans in more than 1,000 Imax theaters over Labor Day weekend before the show heads to ABC in September.
"We spoke with Imax management and, along with beginning to shoot the episodes in Hawaii in early March, Imax has already completed scripts for six of the season's eight episodes," wrote Wold. "Therefore, any impact of the writers strike (if there is one) would be limited to the two final episodes — which would not impact the two-week exclusive theatrical run on global Imax screens beginning on 9/1 (with the first two episodes combined into one episode)."
And the analyst said: "Management noted the only impact would be if they need to stretch the final two episodes on ABC into January, but they believe they have ample room in the schedule for small delays."