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Sanford C. Bernstein analyst Todd Juenger on Thursday downgraded his ratings on the stocks of Walt Disney and Time Warner and suggested a new way of valuing Hollywood conglomerates’ TV units.
In a report entitled “Heightened Risk Calls for a New Valuation Framework,” which looked at the recent decline in sector stocks amid concerns about cord cutting and TV ratings and advertising trends, he downgraded Disney and Time Warner from “outperform” to “market-perform.”
“The most frequent question we hear from investors in the aftermath of the media implosion is “at what multiple should the sector trade”?” Juenger wrote. “We believe a whole new framework is necessary. Historical multiples are irrelevant. We believe the market is now
valuing U.S. ad-supported TV businesses as structurally impaired assets.”
He said he would now value the TV arms of Hollywood conglomerates “based on comparisons from companies/industries in analogous secular decline.” He mentioned the New York Times Co., Time Inc., AOL and Dish Network as such comparables.
“We believe the U.S. television industry is entering a period of prolonged structural decline, caused by a migration of viewers from ad-supported platforms to non-ad-supported, or less-ad-supported platforms,” wrote Juenger. “We favor companies that have the least exposure to U.S. advertising, the most exposure to sports and advantaged positions internationally. But we fear the entire sector will struggle to work until the content owners take concerted action to reclaim on-demand viewing from the SVOD services and use it to protect affiliate fees.”
Juenger found that market-implied valuations “largely mirror our view of fair value,” but said he had to downgrade Disney and TW “as we can no longer advocate a view that either stock will outperform the market over the next 12 months.”
He said he likes shares of 21st Century Fox at current levels. “We still see the most upside at Fox, even under the new compressed multiples,” he said. While the analyst argued that his “outperform” rating seems to be “the right call for patient investors,” he also warned that “we have significant doubts the stock will work for many quarters,” citing doubts that the company can meet guidance for the current fiscal year.
He rates TW, Disney, CBS Corp., AMC Networks, Scripps Networks Interactive and Discovery Communications at “market-perform” and has an “underperform” rating on Viacom’s stock.
Discussing TW, Juenger said his target price still calls for about 15 percent upside, saying “investors who are more bullish on the sector will find a good combination of growth and value in TW shares.” Plus, TW “is also a good choice for investors who are nervous about the sector, but want to stay involved in case the fears prove unwarranted.”
What led to his downgrade? “For one thing, given our negative view on the sector, close calls err on the side of the negative. Additionally, we believe fiscal year 2018 guidance is at risk. Much like we witnessed with Fox shares, we believe once the market starts questioning the long-term guide, the stock will get stuck. And we believe the market has started questioning that guide.”
Discussing Disney, Juenger said “we still see Disney as a great core long-term holding across the media and consumer space.” He explained: “The company enjoys a host of sustainable competitive advantages, extraordinarily durable brands and assets that ought to hold up well in almost any plausible future industry scenario, as well as a long list of upcoming positive events (Star Wars VII, college football championship, Shanghai etc.) However, given the new math applied to Disney’s TV assets, we no longer see enough upside to have conviction the stock will outperform the market over the next 12 months.”
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