FOXA, CBS, DISCA, TWX, VIAB, DIS: Updates Ahead of 1Q18 Earnings -- Pivotal Research

Ahead of 1Q18 earnings we continue to see weak fundamentals for videocentric media owners Cord shaving and cordcutting erodes subscriber bases constraining affiliate fee revenue growth Viewing of video content is still expanding although much of its growth accrues to newer SVOD services and YouTube Advertising continues to look relatively negative as well as the large brands who dominate it are generally limiting growth or reducing spending on the medium and are not likely to be replaced by enough emerging brands to make up the difference High pricing in the coming Upfronts amp8211 mid to highsingle digits for network prime time probably amp8211 won39t flow through to revenues as a result For similar reasons ongoing efforts to bring advanced audience targeting will only slightly curtail the decline By contrast retransmissionconsentrelated fees international content licensing and the directtoconsumer platforms are sources of growth although the latter type of revenue will likely be much lower margin than traditional activities given needs to acquire and manage customer relationships while paying for the storage and physical delivery of content an absence of net neutrality may be negative here too Content costs on those platforms as well as traditional ones are also likely to cause higher spending as networks and OTT platforms find that they have to increase their investments in original programming Toptier sports costs are going to rise at even higher rates amp8211 double digit annual increases we think amp8211 given the unique value that this type of content has to traditional networks as well as to Facebook Google and AmazonWith all of this noted and accounting for the general changes to costs of capital we apply to all companies we cover every quarter companies we cover in the sector look relatively fairly valued 15 around current trading levels resulting in Hold ratings for each of the six This means an upgrade for Disney39s stock which we have rated Sell since the beginning of last year We think that Disney has a lot of positive elements going into the back half of the year including a still very strong film slate the launch of new direct to consumer OTT services and efforts in support of the close of the Fox transaction Our update also means a downgrade for Time Warner whose value is driven by current trading levels of ATampampT under a presumption that the sale of the company goes through from Buy to Hold Meanwhile our price targets on CBS and Viacom are altered negatively for CBS but positively for Viacom We think that investors in CBS face real risks of a transaction they aren39t likely keen about and the possibility that CBS39 CEO may not be a part of the combined entity By contrast Viacom investors seem likely to end up relatively better off in any combination Synergies involved in any combination would be beneficial amp8211 and the two probably would have enhanced negotiating power with advertisers if operating together amp8211 but are mindful that a combined company may feel that it will need to enhance its investments in content and new lowermargin activities in support of longterm growth opportunities It is most likely that if a deal were announced it would be positive for valuations for both companies Discovery also remains a Hold reporting for the first time with the inclusion of Scripps this quarter The combination will undoubtedly produce value in the form of cost synergies but we don39t think it will do much for their negotiating position with distributors or with advertisers in the upcoming Upfronts Although the company produced 12 of national TV commercial impressions during 2017 it remains smaller than several of the other network groups and none of Discovery39s networks has broadcast networkscale audience reach limiting the degree to which the portfolio is quotmustbuyquot for many advertisersWhile each of the companies we cover in this group are Hold rated the relative trading levels of CBS and Viacom and the potential synergies associated with a merger described above make them the most attractive on a relative basis while our model pricing on Disney suggest it is the most expensive on a nearterm basis However over longer time horizons Disney appears to be the best positioned of the group Our YE 2018 price target on CBS is 55 On Disney our target is 93 on Discovery 24 Fox 35 Time Warner 105 and Viacom 34VALUATION We value companies on a DCF basis Key variables driving valuations across the agency holding companies include longterm costs of capital ranging from 91 for Discovery to 133 for Disney Longterm growth rates range from 30 for Viacom to 45 for DisneyRISKS Risks to companies in the sector include the hitdriven nature of video production threats to TV advertising and a pay TV slowdownFULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE TV Update 41718pdfThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated writers amp160amp160

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FOXA, CBS, DISCA, TWX, VIAB, DIS: Updates Ahead of 1Q18 Earnings -- Pivotal Research

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