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Nomura analyst Anthony DiClemente‘s top sector picks for the new year are Walt Disney and Rupert Murdoch‘s 21st Century Fox “given their robust portfolio of sports rights and content that protects them from the evolving media landscape and offers opportunities to develop digital business models to monetize their content.”
He has a “buy” rating on both and at the end of 2014 he raised his price target on Disney from $97 to $105 and on Fox from $41 to $43.
Discussing Disney, DiClemente emphasized the “visibility of ESPN affiliate fee growth,” the company’s “wise approach to digital distribution,” the theme parks unit’s ability to drive studio and consumer products results, financial flexibility for shareholder returns and potential studio upside.
“Although studio results face a tough comparison in 2015 from the success of Frozen, we believe this is fully reflected in Street models,” he said. “Further, Disney’s calendar 2015 studio film slate includes two Pixar films, two Marvel films and the new Star Wars film that can more than offset the difficult compare on a full-year basis and possibly surprise to the upside.”
Discussing Fox, DiClemente said the company is “only beginning to reap the rewards of its investments in the cable networks,” it is “best positioned for international growth” and has financial flexibility and is seeing growth in retransmission consent fees.
Bernstein analyst Todd Juenger likes the same two stocks, plus Time Warner, but he is bearish on the sector in general. “The U.S. media sector is facing its biggest crisis since 2009, and we think this time it’s secular rather than cyclical,” he wrote in a year-end report. “Given weak ratings and ad revenue in the U.S. and our belief this results from a structural change in audience behavior, which will only get worse, 2015 does not seem to be setting up well for U.S. media stocks.”
“Yet, we rate three stocks “outperform”: Fox, Disney, Time Warner,” he continued: “How can those stocks work if the sector is impaired? Answer: their earnings are relatively unaffected by U.S. ad weakness (smallest percentage of revenue from advertising and the most exposure to sports ads). Catalysts also exist.” He cited international exposure as a key benefit as well.
On Time Warner, Juenger said: “If TW succeeds in driving its earnings and therefore stock price up to the about $95 level, investors win.
If TW fails, we believe a takeover bid will come back [after the rejected bid this past summer from Fox], and TW shareholders ultimately also win.”
Wunderlich Securities analyst Matthew Harrigan is more bullish on sector stocks. “Current stock valuations for the large integrated names generally imply nil long-term profit expansion or at least growth lagging nominal sustainable U.S. GDP growth,” he said in a year-end report.
His favorite Hollywood stocks for 2015 are Time Warner and Lionsgate. “Although we are not uber bulls relative to the norm on Turner, we think that the market continually undervalues Warner Bros. and HBO as both businesses continue to hit the same old boring winner,” Harrigan said about Time Warner.
“We also have considerable confidence in Lionsgate’s management to address any earnings..issues with the end of new
Hunger Games releases,” he said. Harrigan also likes film exhibition stocks going into 2015 after weaker box-office results in 2014.
Jefferies analyst John Janedis said ahead of the final days of the year that “the only news flow we expect is related to negotiations between networks, distributors and stations.” Late in the year, he lowered his fourth-quarter advertising estimates for entertainment companies and expects earnings consensus estimates to move lower.
His “highest-conviction” stock with a “buy” rating has been CBS Corp. since late October. “The stock has underperformed” due to weaker ad growth in the industry and broader sector concerns, he argued. Janedis suggested that CBS could monetize spectrum in its nine TV station duopoly markets, which could benefit the stock. He also sees more upside at Showtime, which has fewer subscribers than HBO. The analyst estimates that an incremental 1 million additional subs would add 13 cents in earnings per share.
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