Why It Might Be Time to Buy Media Stocks
Wall Street punishes Hollywood over fears of cord-cutting, but the assault might have created a buying opportunity — for the brave.
This story first appeared in the Feb. 26 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.
Top executives of major media companies aren't doing a very good job convincing Wall Street that cord-cutting won't crush profits. Shares of such top Hollywood conglomerates as Disney, Viacom and 21st Century Fox teetered near 52-week lows after quarterly earnings were disclosed in mid-February amid a new wave of concern that Americans are canceling cable TV services at a fast pace.
Viacom reported earnings Feb. 9, and the stock plunged 21 percent; Disney revealed its most profitable quarter in its history later that day, and the stock dropped 4 percent; Time Warner unveiled strong earnings Feb. 10, and the stock slid 5 percent. CBS chief Leslie Moonves spoke of scatter pricing for advertising being "way up" over last year. Nonetheless, CBS stock dropped after its strong earnings, as did shares of 21st Century Fox and Sony when those companies posted results.
Investors can't seem to shake the bearish sentiment that began in August, when Disney CEO Bob Iger hinted at slower growth for the company's cable networks, including the formerly indestructible ESPN. Since then, Disney shares are off 24 percent, and the six other major conglomerates have seen their stocks follow suit.
But is relief in sight? The declines might have created a buying opportunity, and some Wall Street analysts remain bullish. In fact, a look at one-year price targets set by the major analysts reveals a chance of a big upside if stocks trend higher. Viacom, the most beaten-down of them all, sports a price target of $50.48 when all the major analysts' targets are averaged together — a 54 percent profit given the stock is trading at about $30. Sony is an even bigger bargain if one compares its Feb. 15 price of nearly $21 to its $41.50 target price, a 99 percent upside.
An estimated 1.5 percent of American households are cutting the cord annually, but conglomerates are making up for this by selling content to streaming services. Advertisers also aren't balking at rate increases despite Internet competition. So despite the falling stocks, the potential for profit growth is so strong that Telsey Advisory Group's Tom Eagan initiated coverage of the TV programming sector Feb. 5 with an "outperform" rating on Viacom, Time Warner, Fox and CBS, citing "fundamentals over fear."