In a new report, Sanford C. Bernstein analyst Todd Juenger says that in light of the meltdown of media stocks this month, he’s looking at a new way to look at the industry.
“On a recent sleepless night, we had this epiphany: the market is now valuing U.S. ad-supported TV businesses as structurally impaired assets,” Juenger said in a note Thursday. “We believe this is fair and warranted, because we believe TV advertising is undeniably in secular decline; and affiliate fees are now also being put at increased risk.”
What that means is that media companies are trading at a lower earnings multiple—closer to 7%. And if that’s true, Juenger said he had to downgrade Walt Disney and Time Warner from Outperform to Market Perform.
“We believe the market is now valuing domestic TV businesses similar to such comps as satellite TV, publishing, and even AOL,” Juenger said. “All of these comps have declining subscriber fees and/or advertising displacement. Some have hopeful digital futures, but futures which look very different (and less sizable and profitable) than the analog past. These business all tend to trade at around 7x.”
For Juenger the only media company still on the Outperform list is 21st Century Fox. “There is simply too much growth in FY17-18 to keep the stock below $40,” he said. “But even on that name we remain very cautious in the near-term (e.g. several quarters) on worries that FY16 guidance is (again) at risk (already), among other concerns. In other words, we expect the 12-month Outperformance to be concentrated at the end of the 12-months.”