Landscape Evolves...Position Remains the Same - David Bank, RBC Capital Markets, LLC
Stable core business (long-term relationships/contracts), solid competitive position, and top-line opportunities from developing markets and new digital products along with favorable comparison of earnings multiple in context of PEG continue to make Nielsen an attractive stock.
Putting Pen to Paper on 2016 Watch Top-line Growth Potential -- Heading into 3Q15 earnings, focus will shift into 2016 and potential for Watch top-line acceleration. As new products gain traction (DAR, DCR, etc.) and non-core, low margin products "run-off" (NetRatings) or are likely divested (NRG), core, non-Audio measurement will likely grow in the 6-7% range. While press reports indicate bankers were hired to potentially sell NRG, timing and certainty is unknown. With Audio growth likely to remain in a low-single-digit range, the "net" is Watch on a "reported" basis will probably grow in the mid-to-high 5% range. But "recurring" business revenues will probably increase 6-7%, validating the acceleration thesis.
Investors Have Been Asking More Questions Regarding Competitive Landscape for Domestic TV Audience Measurement -- Given pending consolidation of TV and online audience measurement players, we've been asked often recently by clients if we see NLSN's competitive position as more vulnerable to erosion. While other forms of audience measurement and analytics may very well have a role in the unfolding ecosystem, we don't see much vulnerability to NLSN's position as the currency of TV (and longer-term Video) advertising transactions.
NLSN Offers The Only Cross Platform Currency Measurement "Covering" All Forms of Video -- To our knowledge (and from checks), NLSN remains the only scaled platform measuring over the air TV viewership as well as cable STB and online Video in an integrated fashion. OTA viewership may seem like an afterthought, but it represents close to 10% of total TV viewership, skewing higher amongst certain demos such as Hispanic. Further, NLSN's panel attempts to represent media consumption habits of the entire U.S. (over Cable, Broadband only and OTA) and offers a single unified currency across those measurements. Offering an "apples to apples" comparison of online versus offline cable and OTA viewers with the same panel measuring both should offer competitive advantage versus non-overlapping incomplete census based competition.
To Get TV Dollars, Online Video Will Have to Play by Something Closer to TV's Rules Favoring NLSN -- NLSN historically hasn't dominated online measurement. But, Advertisers will ultimately treat premium video as an "agnostic concept" without regard to screen type. In this world, a unified currency will be required. NLSN has a clear advantage as the dominant player in traditional TV. In other words, as premium online video seeks share, the ecosystem will likely evolve around the bigger pie (TV dollar volume transaction) versus the vastly smaller pie (online video dollars).
Our valuation methodology derives a $54 price target for NLSN shares. We average our sum-of-the-parts analysis, DCF analysis, and forward multiple on a 2016E Adjusted P/E. In our DCF we utilize a WACC of 6.8% and assume a long-term debt to total capital ratio of roughly 28%. The valuation assumes a 2016E Adj. P/E of 19x and a 2016E EV/EBITDA multiple in our sum-of-the-parts analysis of 12x for both the Watch and Buy segments.
Price target impediments:
Financial Results, Particularly Top Line, Could Be Impacted by FX Fluctuations. In 2014, roughly 46% of Nielsen's revenue was in a currency other than the U.S. dollar. This relatively high exposure to foreign currency means that financial performance in any given quarter may be impacted by exchange rates. That said, because operating expenses are also exposed to a similar currency break-down, we believe that the risk to operating income should be lower.
Changes in Consumer Behavior or Political Policy Could Make Online Measurement More Difficult. Nielsen Online Campaign Ratings rely on consumers staying "logged in" to the data partners' website (Facebook), and a reduction in tendency to do so, or software designed to reduce tracking, could decrease the sample size and make online measurement more difficult. Additionally, political policy limiting online tracking, although we don't see any legislation pending, could have a similar effect.
Technological Changes Could Reduce Advantage Provided by Nielsen's TV Panel. If technological changes make it easier to accurately measure viewership, particularly viewership by demographic information, then the value provided by Nielsen's ratings could be diminished. For example, a shift toward Over-the-Top (OTT) viewership could make it easier to measure individual viewership, reducing the value add provided by the TV panel. Another example could be the adoption of set-top box data as a viable alternative to Nielsen's data for certain purposes.
All values in USD unless otherwise noted.
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