Why Improved Pay TV Sub Momentum Isn't Boosting Hollywood Conglomerate Stocks More

The Hollywood Sign - H 2015
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Despite positive trends, one analyst says things are "not exactly encouraging in the absolute."

With Time Warner Cable on Thursday reporting better-than-expected third-quarter pay TV subscriber trends and Charter Communications swinging to a sub gain, Wall Street analysts on Thursday were wondering what the news means for entertainment industry stocks, which last quarter were battered amid cord-cutting fears.

"Does Strong TWC Sub Count Harken the End of Cord-Cutting Risk for Media Stocks?‎" Sanford C. Bernstein analyst Todd Juenger asked in the title of a report.

With the exceptions of Viacom and Sony, entertainment conglomerate stocks closed slightly higher on Tuesday, but some cable providers were stronger, with Charter rising 5 percent and TWC up 4 percent.

Now that the two big cable companies, which are expected to combine in the planned Charter acquisition of TWC, have reported, the companies behind about 70 percent of U.S. pay TV subs have shared their latest figures. "The data seems to point to an annual decline of about 1.0-2.0 million subs," wrote Juenger. "This is about the range most media investors say they're comfortable with. That doesn't count the additional impact of cord-shavers (i.e. 'skinny' bundles)."

His conclusion: "Media bulls will point to [the] better-than-expected pay TV sub count, combined with an expected slight improvement in third-quarter TV advertising (which we think is mostly driven by an inventory squeeze). ... However, any rally in media stocks would have to come from increased multiples, not increased earnings expectations. Sub count expectations may be looking better than expected for the quarter, but they're not better than what is reflected in our models (and sell-side consensus)."

He added: "Note, we still will have lost about 750,000 video subs (plus cord-shaving) in just the past six months. And cable companies are just starting to introduce and aggressively market 'cord-cutter' packages. Not exactly encouraging in the absolute."

And Juenger said: "For media stock multiples to come up, and stay up, the market would have to believe this quarter is enough to have terminal values reflect a long, slow melt of subs closer to 1 percent than 2 percent per annum, with little incremental impact of skinny bundles."

The analyst ended with the following thought: "We wouldn't pay for media stocks as if that were highly certain. We'll see today and over the next few quarters whether the market will."

‎ISI Media analyst Vijay Jayant, meanwhile, lauded video trends for "improving with cable leading the way." But he added: "Total video subscriber losses for the companies that have reported so far have been 67,000, in-line with our estimates.

Said Jayant: "We expected third-quarter video trends to bounce back from the lows experienced in the second quarter. While this is a positive read-through to media companies, we still think skinny video offerings played some part in the quarter's success."