Nielsen: Wall. St. Perspective - Pivotal Research

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BOTTOM LINE: We continue to expect steady business trends for Nielsen in 2Q16 and despite concerns around the competitive position of comScore (which primarily impacts Watch-related revenue streams) and challenges facing many of Nielsen's larger packaged goods customers (which primarily impacts Buy-related revenue streams). Our price target for Nielsen remains at $52 on a YE2016 basis. We continue to rate NLSN Hold.

Concerns about Nielsen remain generally overstated.A concern within the media industry and among investors relates to the degree to which competitive offerings can supplant Nielsen among media owners and agencies, or at least hinder Nielsen's negotiating clout and constrain its revenue growth. comScore has made progress in many areas that are directly competitive with Nielsen's core video measurement business, and emerging companies such as iSpot.TV, Samba and SymphonyAM are with the potential to increase the sector's competitive intensity further. Confidence in Nielsen is further harmed when its biggest customers engage in what can perhaps be described as "trash talk." Indeed, we think that Nielsen remains as well-entrenched as ever, at least among nationally-oriented agencies and media owners, with whom Nielsen typically has staggered multi-year contracts. Risks to the core age and gender measurement that Nielsen provides are vastly over-stated, as most large TV-centric marketers are nowhere near ready to give up on this data. This means the odds that any large agency or media owner will go without Nielsen is approximately nil for the foreseeable future.

New data on market research industry provides incremental confidence on health of Nielsen's business.Another positive consideration relates to the health of the market research industry, a sector in which Nielsen is by far the largest player (with 32% of spending on related activities in 2015). According to data published by the American Marketing Association last month, during 2015 the US marketing research industry grew by a +4.9% annual growth rate, an acceleration from 2014's +3.2% level and the fastest rate of growth since the pre-recession year of 2007. The industry has a 5-year CAGR now of 3.7%, vs. a comparable growth rate of +5.8% for advertising agency revenues and +2.4% for media owner ad revenues over the same time-frame. The market research business outperformed media owners over five, ten and fifteen year periods. Interestingly, if we look at agency services and market research combined as a percentage of paid media advertising, services and research have risen from 17% to 30% of media over the past fifteen years, highlighting a growing relative importance of insights and services vs. paid advertising.

Stable growth seems likely to continue. In this context mid-single digit growth for Nielsen remains a very realistic expectation. Certainly there are risks of diminishing growth for marketers with exposure to Europe in particular, but Nielsen's newer revenue - such as those related to Marketing Effectiveness (especially Nielsen Buyer Insights, Nielsen Catalina Solutions and eXelate) – should provide some offset. For the second quarter, our model incorporates assumptions of +6.1% constant currency growth for Watch and +5.5% constant currency growth for Buy en route to full year growth of +6.0% and +5.4% for the two divisions, respectively. Overall, our revenue expectations are within the range of guidance management provided during its most recent earnings call, as are our expectations for adjusted earnings per share of $2.92, which includes $0.71 for the second quarter. Incorporating minor changes to our model, our price target on Nielsen remains at $52. Given current trading levels around this value, we continue to rate the stock Hold.

VALUATION: We value Nielsen with a DCF, using a 6.4% near-term discount rate, a 10.4% long-term discount rate and long-term 4.0% growth. Our price target equates to a 18x P/E on an adjusted basis.

RISKS include macro-economic trends, the rising availability of less-expensive research solutions (which could impact Nielsen's discretionary services) and the potential that Nielsen's status as the provider of a TV advertising trading currency could be threatened.


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