FOXA, CBS, DISCA, VIAB, DIS: Updates Ahead of 3Q18 Earnings -- Pivotal Research

Ahead of 3Q18 earnings we continue to see weak longerterm fundamentals for videocentric media owners Cord shaving and cutting is eroding sub bases by around 2 annually constraining affiliate fee growth Viewing of video is still expanding although mostly for newer SVOD services and YouTube Advertising is relatively strong at the moment meaning it39s nonnegative but we think it continues to look weaker over longer time horizons as the large brands who dominate it are generally limiting growth or reducing spending Highsingle digit pricing gains in the recent Upfronts won39t flow through to revenues as a result For similar reasons advanced audience targeting initiatives will only slightly curtail the decline By contrast retransmissionconsentrelated fees international content licensing and the D2C 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 are also likely to cause higher spending as networks and OTT platforms find that they must increase their investments in original programming Toptier sports costs are going to rise at even higher rates double digit annual increases we think given the unique value that this type of content has to traditional networks as well as to Facebook Google and Amazon If there is one positive trend at present it is the strength of political advertising helping station owners in battleground states in the upcoming electionAt a company specific trends and issues to monitor include the followingAt Fox we see a company positioning itself to be much more dependent on newsrelated programming and sports While initiatives the company takes to improve those business are worth monitoring our guess is that there will eventually be more MampampA activity for the company such as a deeper investment in the broadcasting business or possibly a recombination with News Corp in some form For the present time the core business won39t matter much to valuation as the bulk of its value remains tied up in the value of Disney stock and cashAt CBS there have been managerial changes in the past couple of weeks as the interim CEO has appointed new noninterim heads of HR corporate communications and a CFO The changes are understandable in context of an organization that is looking to distance itself from the past and move itself forward However putting aside the merits of the individuals in those roles the appointments are also unusual considering the interim nature of the CEO role at this time Another wild card in governance and management relates to the changing of the interim Chairmanship of the overall company over the weekend In the short term we don39t think anything should get in the way of anticipated operating trends but we are mindful that the company may yet go through further organizational changes whether with the current team in place or another oneDiscovery39s stock has been holding up well as investor concerns around Discovery39s future on vMVPDs have generally abated However those concerns always seemed overblown and so recent announcements weren39t particularly meaningful beyond the boost we now expect in next year39s affiliate fee revenue expectations Discovery should do well on the advertising front in the current quarter especially as likeforlike share of ad impressions have grown significantly driven both by viewing share gains and by increases in ad loads as well as general pricing increases Generally we still view Discovery39s longterm position as weaker than owners of broadcast networks whose positions we see as relatively more durable but also recognize that its international activities should be viewed as a positive attribute for the companyViacom faces many of the same negative issues impacting Discovery but it underinvested in growth opportunities especially on digital media for a significant amount of time and supported a nonprofitable studio for an extended period as well Its recent resumption of managerial normalcy and focus on opportunities to drive growth should support superior bottom line growth relative to peers over the medium term A downside remains in the company39s suboptimal ownership structure but upside probably exists for Viacom if that same ownership structure ultimately leads it to control CBS at some point in the futureWith Disney we have incorporated into our model our first pass at crude assumptions around the revenue and profit impact from the launch of ESPN the Disneybranded streaming service and the consolidation of Hulu There are many many wildcards to consider in these estimates which are much better characterized as quotstarting assumptionsquot As a best guess we think that Disney will manage these businesses for overall profit growth rather than for margins and that there will be significant costs incurred especially in 2019 in exchange for slightly faster longterm growth The overall effect on our DCFdriven valuation is relatively neutral Overall while we continue to believe that Disney is the best positioned among peers on a strategic basis on a relative basis vs other companies we cover we continue to see the stock as relatively overvaluedAccounting for these factors and changes in costs of capital price targets and recommendations are mostly unchanged with Hold ratings on CBS Fox and Viacom and Sell ratings on Discovery and DisneyVALUATION We value companies on a DCF basis Key variables include longterm costs of capital ranging from 124 for Discovery to 142 for Disney Longterm growth rates range from 25 for Viacom to 5 for DisneyRISKS Risks to companies in the sector include the hitdriven nature of video production threats to TV advertising and a pay TV slowdownamp160FULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE TV Update 102318pdfClick the social buttons above or below to share this story with your friends and colleaguesThe 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

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FOXA, CBS, DISCA, VIAB, DIS: Updates Ahead of 3Q18 Earnings -- Pivotal Research

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FOXA, CBS, DISCA, VIAB, DIS: Updates Ahead of 3Q18 Earnings -- Pivotal Research

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