CBS, Time Warner, Fox, Viacom, Disney Wall St. Review

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TV Network Owners: Updated Models

BOTTOM LINE: We are updating models and price targets prior to calendar year 4Q15 earnings season. In this note we focus on TV network owners, including CBS, Discovery Communications, Time Warner, Fox, Viacom and Disney.

A common theme in our update is a slight downward revision in long-term margin expectations associated with the increasingly evident need for network owners to invest more heavily in increasingly expensive content and / or product marketing and subscriber efforts as network-owned OTT services become increasingly common ways for media owners to distribute and monetize content. At the same time, the outlook for advertising looks better – or at least less bad – relative to expectations that most of Wall Street has had. A positive environment for national TV advertising should be evident in the fourth quarter, and a solid 2016 looks increasingly likely, even excluding the benefit of the Olympics later in the year. However, over the very long-run we still think that advertising will probably continue to face revenue growth pressures so long as incumbent marketers remain highly cost focused and few new categories of marketers emerge to drive sustained acceleration for the medium.

Incorporating updates for the current quarter which rely in part on our analysis of Nielsen data related to commercial inventory and longer-term model tweaks and ongoing revisions primarily around advertising and distribution fee growth as well as profit margins and near-term foreign exchange trends, price targets are generally slightly lower for companies in this sector, with Time Warner's price target up slightly and Viacom's down more significantly than others in the group.

Within the group, Viacom and Discovery both offer the highest price targets relative to current trading levels. Viacom remains cheap by any measure, but it understandably "toxic" for many investors lacking longer time horizons or tolerance for further turbulence yet to come. Discovery is more palatable on most dimensions, although we think that upside potential there is not without some risks, either. And while both companies can be knocked with the risk that neither produces a significant volume of "must have" programming relative to peers (potentially limiting revenue upside from OTT distributors), both companies offer investors a more important benefit as either one could serve as acquisition fodder in the long run.

Additional commentary related to current quarter expectations and key longer-term issues for each company follow in this note.

VALUATION. We value companies under coverage on a DCF basis. Our YE2016 price targets equate to P/E multiples of 15x for CBS, 17x for Discovery, 15x for Fox, 16x for Time Warner, 10x for Viacom and 18x for the Walt Disney Company.

RISKS:Investors will need to consider the sector's risks as including the hit-driven nature of producing television programming, threats to TV advertising and an accelerated slowdown for the pay TV industry.


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