Media Stocks Decline - What Mattered to Wall St. - Anthony DiClemente, Nomura Markets Research

Disney Guidance Revision Jolts US Media Industry; Fear Creates Opportunity for Oversold Names

 2Q15 earnings season has mercifully drawn to a close for US Media. On Tuesday, Disney's modest change to its cable networks guidance shook media investor confidence, as the sector lost ~10% of its value over the course of the week. But heightened emotion often creates opportunity, and historically, times of great fear have been buying opportunities for the Media sector group. We'd like to see technical forces and anxiety-driven decisions subside, at which point we would become more positive on the group. While consumer behavior is certainly shifting to internet video, we do not believe the panic in the marketplace is proportionate to the quantitative evidence of underlying trends. We are incrementally constructive on DIS, CBS and TWX at these lower levels. Five key points:

1) Though cable TV suffers small subscriber losses, they are not accelerating . . . Disney is seeing modest erosion in basic cable subs, but this is nothing new. DIS, TWX, and DISCA have been very clearly referencing modest sub erosion since last year, so to us, this was not new information. Sub losses have been contained to the 1mn-2mn range, if that. Our bottoms-up sub analysis adds new online video distributor (OVD) subs like SlingTV to the equation.

2). . . But, let's just assume subs are accelerating; our analysis implies less EPS downside than market suggesting. Even if the Media sector were to lose 5mn subs (5% of total) the sector would suffer just 7% weighted EPS declines (some more, some less, of course); the result of our analysis is that DIS, TWX, and CBS are least affected. Email us for our scenario analysis of the impact of lost subs and associated ad revenue on the ecosystem.

3) TV advertising market: forward commentary actually bullish. The group posted ad revenue deceleration in the 2Q, but most emphasized the improvement in 3Q advertising demand and revenue/pricing improvement. On the supply side, ratings declines remain a hurdle to near-term ad recovery for some, but given positive commentary by TWX, CBS, DISCA, SNI, and AMCX, we feel comfortable with 3Q ad trends.

4) Response from leadership could include strategic action, consolidation. More aggressive direct-to-consumer and online bundling strategies, financial/strategic action like spinoffs, and industry consolidation all have become more likely. Naturally, asset revaluations create opportunity for possible consolidators like Verizon, Liberty, and/or the tech/ internet giants looking to build their content portfolios.

5) Valuation multiple compression leaves the group in line with the S&P 500. Currently, the group is now trading at 15.8x 2016E EPS, with Media multiples down roughly 7% (1.1x) vs last week. Admittedly, they are not yet bargain-basement-cheap on average, but for companies who have scale, sports, and a direct-to-consumer strategy, we are sanguine. We like CBS given they are content studio least vulnerable to losses from the bundle; Disney, given its leading position in film/global home video, consumer brands, and theme parks; and TWX, given its ownership of a major TV/film content studio, strategic value of HBO, and its relatively attractive valuation.

CLICK TO ACCESS RESEARCH REPORT/PRESENTATION (including important disclosures):

Americas Media - What Mattered to 2Q15 Media Earnings

Prepared by Nomura Securities International, Inc. For complete details of the research together with the associated important disclosures, analyst certification, valuation methodology and discussion of risks, please click here.

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