Two Wall Street analysts issued updates yesterday for pretty much all of the media/entertainment companies that they follow. They don’t see a light at the end of the tunnel. At least not yet. Lee Westerfield at BMO Capital Markets says the US advertising cycle has gotten worse and not yet bottomed out. At Lehman Brothers, Anthony DiClemente, who was already cautious about ad-supported media, is now also worried the digital challenges facing entertainment companies.
Westerfield notes that the contrarian case for buying broadcasting stocks now does sound tempting…but.
“The last time radio and TV traded at their currently low P/FCF multiples was 1990-92, when ‘all-hope-was-lost for broadcasting’ during the high-yield debt market fallout. As then, broadcast sector equity has fallen sharply – down 33% on average year-to-date – even as the ad cycle downturn and tightening of credit to fund radio and TV asset purchases have each driven down broadcast stick-asset values. Surely, these risk factors must have been digested given where radio and TV now trade? We think not sufficiently as yet. Time will tell. At this point, we are not climbing aboard the contrarian train, though. Here is why: there is no trough in sight to the ad cycle and ad rate pressures, nor embers in credit markets to stoke TV and radio transactions and restore lender confidence in stick-value,” Westerfield told clients.
He has, in fact, turned more pessimistic about the overall US ad market. Rather than total ad spend growth of 3.6% this year he is now forecasting only 1.8% growth in 2008 and 1.9% growth in 2009, down from his previous estimate of 2.7%. He does, however, see that jumping back to 6.1% growth in 2010 – but that’s quite a way off.
For radio, Westerfield sees 2008 revenues coming in 5.5% below last year, worse than his previous estimate of a 2.3% decline. He sees another drop in 2009 of 2.7%, a worse outlook than his previous forecast of a 1.7% drop. For 2010, his outlook is about flat – a gain of a mere 0.2%. This is Westerfield’s initial forecast for 2010.
Spot TV is in better shape, owing to the election cycle. But Westerfield has significantly reduced his forecast for 2008 growth – now only 4.5%, down from his previous 9.8%. For the 2009 off-year, he now forecasts that Spot TV will be down 9.1%, worse than his previous estimate of a 6.7% decline. 2010, of course, will be another federal election year, and Westerfield is predicting 17.1% growth in his first stab at forecast that year.
While Westerfield left most of his stock ratings intact, except for downgrading Salem Communications to Market Perform from Outperform, DiClemente downgraded several of the biggest media companies. His new worry is about digital distribution taking an increasingly large bite out of DVD sales, although cannibalization has thus far been limited.
“But we believe ‘packaged media’ is a declining business and find it difficult to quantify how new digital revenue streams could even begin to offset the $24 billion/year U.S. retail home video market — a market which we believe has just entered secular decline. The question is the rate of decline; we believe the decline in packaged media revenues will dramatically outpace growth in digital media revenues in the next two years,” he told clients. Taken with other concerns, the Lehman Brothers analyst issued these downgrades:
— We are lowering our rating on the Walt Disney Co., the owner of the Disney/ Buena Vista studio, to 3-Underweight and a $29 price target for three additional reasons: 1) A deteriorating economy could have an impact on theme parks results in FY09E, 2) The ABC network and ABC TV stations face continued structural and cyclical headwinds, and 3) Disney trades a significant valuation premium to its peers.
— We are lowering our rating on News Corp., the owner of the 20th Century Fox studio, to 2-Equal weight and our price target goes to $15 from $26 for three additional reasons: 1) Exposure to Newspapers domestically and internationally are likely to serve as an increasing drag; 2) Fox TV network and TV station group remain challenged; and 3) Acquisition risk remains a key concern.
— We are lowering our rating on Time Warner Inc, the owner of Warner Brothers, to a 2-Equal weight and a $14 price target for three additional reasons: 1) We are concerned regarding future capital allocation of the $9.3B special dividend from Time Warner Cable; 2) Uncertainty remains surrounding plans for Time, Inc.; and 3) Visibility remains limited for AOL’s operational and strategic options.
— We are lowering our rating on CBS Corp., the owner of CBS TV Studio, to a 3-Underweight and a $16 price target for three additional reasons: 1) Persistent radio industry and CBS Radio revenue declines; 2) Continued structural and cyclical weakness at the CBS TV network and CBS TV station group; and 3) Acquisition risk in light of recent value-dilutive purchase of CNET.
— We are lowering our price target on Viacom to $32 per share from $46 per share but maintaining our 2-Equal weight rating for three reasons: 1) incremental contributions from Rock Band; 2) affiliate fees provide some stability; and 3) international expansion.
RBR/TVBR observation: Where is the light at the end of this tunnel? There is a lot of money potentially to be made in buying the beaten-up stocks of radio, television and other media companies if you can call a bottom and then see a recovery. But who among us is wise enough (or luck enough, or clairvoyant enough) to make that call correctly?
