Goldman Restacks Media Stock Ratings, Downgrades Viacom

• Media shares have broadly been under pressure over the past one month.
• Goldman Sachs’ Drew Borst downgraded the ratings on Viacom, Inc VIAB and Scripps Networks Interactive, Inc. SNI, while upgrading the rating on Outfront Media Inc OUT.
• Average media stocks are trading at a near trough and investors should selectively pick stocks and not sell the group further, Borst believes.

Analyst Drew Borst noted that average media stocks covered by Goldman Sachs are down 19 percent due to concerns over pay TV sub growth and now trade at a “near-trough.” Instead of selling these stocks further, investors should pick up selective stocks, Borst added.

In the report Goldman Sachs mentioned that it was repositioning the ratings and cutting the target prices of several media stocks in view of the “headwinds to TV ad growth from ratings, share losses to digital, and poor digital monetization.” The changes in rating also reflect a cautious stance on pay TV subs “driven by cord cutting skinny bundles,” and the consolidation in the pay TV segment.

Viacom Stock To Face Continued Pressure

Analyst Drew Borst downgraded the rating on Viacom to Neutral, while reducing the price target from $69 to $46. Viacom’s stock is expected to face continued pressure on growing concerns over the company’s ability to sustain affiliate fee growth, decline in advertising revenues, comparatively high balance sheet leverage and a slowdown in the buybacks.

“We see continued pressure on VIAB stock as we believe consensus EPS estimates are 5%/13% too high in FY16/17 and see the risk of several negative catalysts,” Borst wrote. The underperformance of Viacom’s cable networks and negative ad trends are also expected to exert pressure on the company’s credit rating unless it takes steps to reduce its gross leverage ratio.

“Accordingly, we expect VIAB to redirect free cash flow toward debt reduction and away from repurchases,” the report added.

SNI’s High Exposure To TV Advertising

Borst downgraded the rating on Scripps Networks from Neutral to Sell, while reducing the price target from $74 to $47.

The company’s high exposure to TV advertising in comparison to its cable TV peers is a concern area, Borst noted, while adding that the stock is likely to face continued pressure in the near future.

An expected slowdown in Scripps Networks’ affiliate growth to 3-4 percent in 2016-17, from 5-7 percent in 2013-15, reflects cord cutting and limited benefits from online licensing revenues. “Unlike other cable network groups, we expect SVOD content licensing revenue for SNI to remain relatively modest,” the Goldman Sachs report stated.

Recent Underperformance Creates An Attractive Entry Point

Borst upgraded the rating on Outfront Media from Neutral to Buy, while reducing the price target by $26 to $23.

Unlike TV and other traditional media forms like radio and newspapers, the out-of-home segment is not affected by disruptions in impressions from the digital media, Borst said. He added that Outfront Media is well positioned to “retain the NY MTA contract and that the Diamond small cell deal could provide upside to 2016 EBITDA estimates.”

The analyst expects the new GICS sector to result in investors paying more attention to REITs and to “benefit undervalued REIT stocks including OUT.”