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Bernstein Weighs In on Media Stocks: Walt Disney Co (DIS), Time Warner Inc (TWX), Twenty-First Century Fox Inc (FOXA)

Walt Disney Co (NYSE:DIS) shares tanked 6% after an analyst downgraded the stock from an Outperform to a Market Perform rating yesterday. So far, Disney’s shares have gone down 9.5% since second quarter earnings report on Aug 5, while year to date, shares have gained 7.3%.

Not just Disney, but the entire media sector had a rough day after Todd Juenger of Bernstein Research cautioned investors about the bleak future of cable TV.

In his report, Juenger stated that TV industry is “structurally impaired.” Along with waning advertising revenues, affiliate revenues have also started to face a plethora of challenges as more and more subscribers cut the cord or opt for skinny bundles. Moreover, investors are now treating TV related businesses as structurally impaired assets.

Juenger finds “sum-of-the-parts” valuation appropriate for media stocks now, as separating the value of the TV operations which are marred by sluggish growth and have a higher risk, will help to arrive at fair valuation.

Juenger also downgraded Time Warner Inc (NYSE:TWX) to Market perform while touting Twenty-First Century Fox Inc (NASDAQ:FOXA) as the media stock with highest upside potential.

This is the second time in the month that a broader sell off has been witnessed in the entire media sector. The first sell off started after Disney reported its second-quarter earnings on Aug 5. Although the company beat on the bottom-line expectations, it narrowly missed the top line. It also acknowledged that ESPN is losing subscribers but refrained from providing data.

Subsequently, the company issued a cautious outlook for its largest and crucial division – Media Networks, sending investors into a tizzy.  All the other companies that subsequently released their earnings results in the same week, including media giants like Twenty-First Century Fox, Viacom, Inc., CBS Corp, and Time Warner, saw their respective stocks trading down as investors panicked. More than $35 billion in market cap was erased within that week.

Yesterday’s report was enough to push the already panic-stricken investors toward another sell off. Disney took the maximum beating as uncertainty surrounding ESPN, the premier sports network, became grimmer.

Of late, ESPN has come under a lot of pressure as the Pay TV landscape continues to alter owing to migration of subscribers to online TV. Falling subscriptions will have a telling effect on the network’s ad revenues. ESPN reported 3% decline in revenues for the third quarter of fiscal 2015.

Though Disney’s other segments Parks and Resorts, Studio segment and Consumer Products display tremendous potential, investors remain skeptical. Media Networks has traditionally been the highest contributor to Disney’s profit but that looks challenged with rapidly changing TV ecosystem.

Going forward, things don’t appear to be in the sector’s favor. The Pay TV landscape will continue to drastically alter the playing field with the advent of unbundling/skinny bundling. Increasing cord cutters mean that advertising dollars will move away from TV to various digital platforms. The loss of subscribers will eventually reflect on affiliate revenues as this is also calculated on a per-subscriber basis.

To battle the odds, the companies are trying to expand into digital services and overhaul their existing revenue models. This, however, remains a time-consuming affair.

At present, we also maintain Disney as a Zacks Rank #3 (Hold).

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