While all media stocks are not equal, they all fell by similar amounts during the market meltdown over the last three weeks.
Analyst Michael Nathanson of MoffettNathanson Research, calculates that the earnings multiples for the TV network companies that he covers all declined within a narrow margin of between 16% and 21%, with Scripps Networks and AMC Networks on the low end and Viacom on the high end.
“This makes no sense and shows the level of panic selling over the past few weeks,” Nathanson says in a note published Friday morning. “Given broad fears of ‘structural decline,’ the market decided to sell stocks first and ask questions later.”
Nathanson notes that different stocks have different exposure to advertising and some have greater dependence on affiliate fees. “There is no logic in slashing the multiples of these stocks by the same razor,” he says.
Nathanson advises that for the near term, investors should avoid companies with the combination of weak ratings and high level of national ad exposure. He says that scatter pricing is relatively strong because inventories are tight as networks give advertisers make-goods to compensate for low ratings. And ratings might look OK because of comparisons to very big drops a year ago, he adds.
Since Monday’s big drop, media stocks have followed the broader market higher although some have done better than others. Notably Disney is up 7%, the best performer, while Viacom lags, up 2%
“Until Viacom can show sustained ratings improvement or can renew its affiliation agreement with Dish, many of our clients are worried about catching a falling knife,” Nathanson concludes. “In looking at core revenue drivers, near-term earnings momentum and future catalysts, we continue to recommend Disney, 21st Century Fox, and Time Warner for a long term view. All have a combination of low non-sports advertising exposure, safeguarded affiliate fee drivers, must-have content, and a diversified revenue base.”