Analysts Debate Entertainment Stocks, Debt Issues as U.S. Markets Drop Again

Amid continued economic concerns, UBS analyst John Janedis says the entertainment company with the highest advertising exposure is Scripps Networks (68 percent), followed by CBS Corp. (64 percent) and Discovery Communications (44 percent).

NEW YORK - U.S. stock markets declined again on Monday, the first trading day since big credit ratings agency Standard & Poor's downgraded the debt rating of the U.S. from its long-held AAA late Friday.

While debt analysts predicted no immediate debt challenges for entertainment conglomerates, stocks of many Hollywood biggies once again declined Monday.

Heather Goodchild, analyst at Standard & Poor's, said she expects "no immediate effect" of the lower U.S. debt rating on entertainment companies. Lower debt ratings make borrowing more expensive.

Neil Begley, analyst at fellow ratings agency Moody's, similarly told The Hollywood Reporter. "I don't anticipate any issues with investment grade media companies as their maturity profiles appear very strong with most companies possessing a combination of enough cash and annual free cash flow generation to cover maturing debt for the next several years or more."

Among tumbling stocks, which sent down the broad-based S&P 500 stock index by 6.7 percent, CBS shares on Monday closed down 10.3 percent at $21.31 after recently trading near the $30 mark. Among other sector biggies, Viacom's stock was down 8.8 percent, News Corp. fell 7.2 percent, Walt Disney dropped another 6.1 percent, and Time Warner finished 5.8 percent lower at $29.89 - near its 52-week low of $29.21.

UBS entertainment industry analyst John Janedis on Monday reiterated though that CBS and Viacom, which he rates at a "buy," are his favorite sector conglomerate stocks.

Citing the industry's return to "normalized advertising growth," he had downgraded his rating on the entertainment sector to "neutral" in late June.

"Since that time, CBS, Discovery, Time Warner and Viacom have reported second-quarter results, with U.S. ad revenues generally in-line to slightly below our [and Wall] Street expectations and reaffirmed that the ad market remains healthy," Janedis said in a report Monday. "While our view seems somewhat more negative, based on checks, we continue to believe our thesis is playing out and remain cautious on media stocks broadly."

He also analyzed the sensitivity of key entertainment company to changes in advertising growth rates amid renewed economic concerns.

"We would not expect the advertising decline to be as severe" as in the most recent recession, he said, but said he is assuming a potential 5 percent reduction in ad growth rates across media segments.

The entertainment company with the most advertising exposure is Scripps Networks, where he estimates advertising will contribute 68 percent of 2012 revenue, followed closely by CBS Corp. (64 percent) and Discovery Communications (44 percent), Janedis said.

"CBS has the most exposure to advertising from a gross dollars perspective. Disney (19 percent), Time Warner (21 percent) and Viacom (35 percent) have less advertising exposure, primarily due to other non- advertising business units, such as parks, film," he said. "Based on our assumptions, we believe New York Times Co. (23 percent) has the greatest risk to earnings in a downturn, followed by Interpublic (12 percent), Gannett (9 percent) and CBS (9 percent)."

Meanwhile, Evercore Partners analyst Alan Gould said Viacom and News Corp. are his "highest conviction buys in this environment" of economic uncertainty in the entertainment industry.

"News has historically traded at a discount to the group, but that discount has widened during the current scandal despite the fact that most likely scenarios, except for the highly unlikely loss of the U.S. TV properties, should be a positive for the stock," Gould said.

And about his other top pick, he said: "Viacom is the best positioned media conglomerate for a choppy market. Thirty-five percent of its revenue is advertising driven – one of the lowest in the group, its average affiliate pricing is inexpensive, and its film earnings are relatively low providing the potential for upside."


Twitter: @georgszalai