Weekly Media Notes: Continued Sell-off In Media Stocks Amid Future Growth Concerns

Thursday saw a massive sell-off in global equities amid concerns that decelerating Chinese economy may slower global growth. The Dow Jones U.S. Media Index also plunged 4% in Thursday’s trade. The media industry was hit hard for its own reasons. The concerns over the media industry largely pertain to slower affiliate growth, as signaled by Disney in its recent earnings release. The concerns were widespread across the industry and stocks like Viacom are trading at significantly lower valuations. On that note, we discuss below the developments related to media companies over the last week or so.

Disney

Disney (NYSE:DIS) recently in D23 Fan Expo announced that Star Wars will get its own themed lands in Disneyland California and Walt Disney World in Orlando. The development will begin in 2017 and the attractions will be based on the upcoming movies rather than the earlier released movies from the series. ^[1] Fans may have expected the attraction to come up sooner but Disney will likely wait for 2016 opening of Wizarding World West at the Universal theme park. However, it will bring Season of the Force to California, a version of Star Wars Weekend in Florida, much before the Star Wars Land. Theme parks provide stable cash flows to Disney and at the same time offer a platform to cross-market its other products and services. Earlier this year, the company had announced that it will open Star Wars attraction in its Shanghai resort as well. We continue to believe that, in the short-to-medium term, Disney’s stock will primarily be driven by two factors — Star Wars and Shanghai (see – Disney Lowers FY 16 Guidance, Though Star Wars And Shanghai Are Key Factors To Driving Future Growth).

Looking at Disney’s stock, it has plunged over 15% since the company reported its earnings in the first week of August. The company’s statement regarding slower growth at cable affiliates and minor subscriber losses at ESPN, have caused a panic among investors and the entire media basket has been sold heavily. It must be noted that media companies earns revenues primarily from two sources – advertising and affiliate fees. We know that ad spending on television is on a decline and the media companies have been growing their affiliate income, but the newly raised concerns over the growth potential of affiliate income, given the shift in viewing habits from traditional to digital platforms. While the investor concerns are genuine, it is unlikely for Disney to see declines in affiliate revenues in the near term. In fact, the company only lowered the growth forecast.

• Trefis has a $104 price estimate for Disney’s shares, translating into a $176 billion market cap. This is slightly above the market price of around $100 seen over the week.
• We estimate the company’s 2015 revenues to be around $52.40 billion for earnings per share of $4.94, compared to consensus of $5.01, according to Reuters.

Viacom

Viacom’s (NASDAQ:VIA) stock has plunged over 25% so far in August. This can partly be attributed to June quarter earnings and more recently to the concerns over carriage renewal with Dish Network. Losing Dish could have a significant impact on Viacom and result in more than 10% downside to our current price estimate. There is a fair probability of Dish dropping Viacom networks from its pay-TV bundle (see – What Happens If Dish Decides To Drop Viacom?).

• Trefis has a $72 price estimate for Viacom’s shares, translating into a $29 billion market cap. This is much higher than the market price of around $42 seen over the week but in line with street estimates, as complied by the Wall Street Journal.

• We estimate the company’s 2015 revenues to be around $14 billion for an earnings per share of $5.74, compared to a consensus of $5.88, according to Reuters.

21st Century Fox

21st Century Fox’s (NYSE:DIS) Fox News inched up to No. 1 spot in all of primetime cable in the past two weeks. It is likely to end August among the top 3 cable networks. ^[2] Fox News saw higher viewership due to its “summer of Trump” and the 2016 campaign. The continued growth in viewership will surely aid its advertising revenues. Fox News is a widely reached network with 90% penetration among U.S. pay-TV households, and owing to its popularity, we believe any significant decline is unlikely.

Looking at Fox’s stock, it has also plunged close to 15% in August amid concerns over future growth. The media landscape is changing and more people are embracing the newer technologies such as Netflix and Hulu Plus. There is evidence of cord cutting and concerns over affiliate growth. All these factors have led to a correction in the media stocks and given the uncertainties in the near term, this is unlikely to change. The big trigger would be Viacom’s deal with Dish. If the carriage deal is renewed, it will not only be a major relief for Viacom, but also send positive vibes among investors across the media industry.

• Trefis has a $39 price estimate for 21st Century Fox’s shares, translating into a $80 billion market cap. This is roughly 35% ahead of the market price of around $29 seen over the week.
• We estimate the company’s 2015 revenues to be around $30 billion for earnings per share of $1.72, compared to consensus of $1.70, according to Reuters.

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1. ‘Star Wars’ to take off at Disneyland, The Seattle Times, Aug 17, 2015 [↩]
2. Fox News Tops All Primetime Basic Cable Ratings for 2nd Straight Week, The Wrap, Aug 19, 2015 [↩]