Credit Suisse Admits Cable Earnings Were Bad, Pounds The Table On Media Stocks Anyway

Credit Suisse's Omar Sheikh reduced the aggregate EBITDA forecasts for 2016 and 2017 by 1.6 percent and 2.5 percent, respectively, after the US large-cap Media/Cable companies reported earnings. The revisions were mostly cost-driven, rather than being revenue-driven.

Analyst Omar Sheikh mentioned the key takeaways from the earnings as:

1. Significant pickup in domestic advertising
2. Stabilizing declines in Pay TV universe
3. Recovery in linear viewing

Sheikh maintained an Overweight view on the US Media & Entertainment sector, saying that industry trends seemed to be stabilizing, while large-cap valuations were “compelling,” after their underperformance through the earnings season. He commented, “After a choppy two years, the sector is well-placed to attract investor support.”

Top Picks

Sheikh named Time Warner Inc TWX and CBS Corporation CBS as the top picks. While maintaining an Outperform rating for both companies, the analyst left the price target for Time Warner unchanged at $90, while reducing the price target for CBS from $75 to $70.

Time Warner reported its 4Q results short of expectations, and CBS has suffered 18 months of earnings deterioration, the analyst said. He added, however, that these trends were unlikely to continue into 2016.

Incrementally More Bullish

Following the earnings season, Sheikh said that he was “incrementally more bullish” on CBS and Twenty-First Century Fox Inc FOXA. He maintained an Outperform rating for Twenty-First Century Fox, while reducing the price target from $38 to $37.

“For FOXA, visibility on fiscal '17 growth, strong Hulu trends, and the sizeable discount to our SOTP valuation all make us more positive. For CBS, the strength of the TV ad market, upward momentum on retrans/reverse comp and potential upside to content license revenues this year are all tailwinds for the equity story,” the Credit Suisse report noted.

Other Stocks

While mentioning that there were investor concerns related to the slowdown in growth at ESPN, Sheikh pointed out that Walt Disney Co DIS had a number of options to balance off the potential slowdown. He maintained an Outperform rating for the company, with a price target of $130.

The analyst believes that investors may not be considering the impact of Disney reducing the use of shared passwords for WatchESPN and distributing ESPN in unbundled form either direct to consumer or with third party partners. He added, “We think it is wrong to ignore the potential impact of both strategies.”

Sheikh maintained an Outperform rating for Viacom, Inc. VIAB, while reducing the price target from $65 to $50. The Credit Suisse report noted, “Viacom shares continue to offer substantial valuation upside, but a rapid recovery in earnings is increasingly reliant on a restructuring of the core cable networks portfolio in our view.”

Viacom has recently announced the auction of a "significant minority stake" in Paramount Pictures, which the analyst believes could “prove pivotal” for the company. He estimated the studio to be worth only about $2.5bn-$3.5bn if a minority stake is sold, while it could be $5bn-$6bn if a buyer is found for 100 percent of the studio.

The latter would enable Viacom to reduce 2016 gross leverage, free up more than $4bn of capital and increase the company's ability to restructure, Sheikh commented.