KeyBanc dims view of media stocks, with ads and economy feeding downturn
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KeyBanc analyst Brandon Nispel on Wednesday lowered his estimates on the media sector, rebuilding his model in the face of the group's heavy challenges - notably the macroeconomic downturn and increasing competition for ads in a tough environment.
Only one stock in the group gets an overweight rating from Nispel: Disney (NYSE:DIS), on which he's cutting his price target to $143 from $154. Disney (DIS) stock closed Wednesday at $104.62 a share.
When it comes to advertising, concerns are well documented - and Nispel is worried about a challenging macro environment, recent negative comments from Snap (SNAP) and others around brand advertising, and ad-tier launches of major streaming services from both Netflix (NFLX) and Disney (DIS), which, according to Nispel, "suggests more competition in a declining category."
On affiliate revenues, Nispel expect pay TV subscriber losses to continue in the mid- to high-single digit percentages, and pricing power is "slowly eroding," which will likely result in declines in that revenue stream as well.
On the other hand, a "highly unprofitable" streaming space may be near peak losses and "service consolidation might help the industry structure particularly around streaming churn, which has stabilized in our data," Nispel said.
"Net, we think this is a relatively unattractive space currently," Nispel said.
On his relative high note of Disney (DIS), Nispel said the company's focus on sports positions it favorably in comparison, adding that Disney (DIS) has set up a streaming platform allowing for the transition of its linear customers to streaming - ESPN to ESPN+; FX/ABC general entertainment to Hulu; Disney Channel to Disney+ - that's "difficult for others to replicate." And the company's parks are "resilient" and feeding cash into the business to cover streaming transition costs.
One other positive note comes on Fox (FOX) (NASDAQ:FOXA), which gets a sector weight rating from Nispel, who said the company's core business is undervalued for relative outperformance. The balance sheet is under-levered and it has a shareholder-friendly capital allocation, though it's hard to see how Fox (FOX) (FOXA) manages the linear-to-streaming transition as well as Disney (DIS).
On the downside, Paramount's (NASDAQ:PARA) (PARAA) media networks are "likely poorly positioned and most susceptible to challenging macro and competition." It's at a premium valuation to peers and Nispel expects EBITDA is likely to decline through 2023.
While Warner Bros. Discovery (WBD) is working through merger issues, Nispel said "the WarnerMedia assets need fixing, which likely leads to negative underlying growth" Nispel added that Warner Bros. Discovery (WBD) is unlikely to outperform amid a large pay TV business and the lack, for now, of a combined HBO Max/Discovery+ streaming service.
And Comcast (NASDAQ:CMCSA) has a relatively healthy core business, even with tough Olympics comparisons, but paid subscriber growth at Peacock is "underwhelming." Nispel has a sector weight on the company's stock, and likes the valuation, saying the catalyst likely comes from the cable side rather than NBCUniversal.
Comcast is set to report earnings on Thursday; Fox, Paramount and Warner Bros. Discovery report next week; and Disney is set to report Nov. 8.