Morgan Stanley media analyst Ben Swinburne upgraded his rating on the media sector to “attractive” from “cautious” Monday, citing expected revenue growth on the distribution side, a resurgent and resilient advertising market and continued hidden value in the stocks.
"Looking forward we see TV distribution revenue growth accelerating, increasing confidence in earnings growth and moving us from bearish to bullish," Swinburne wrote in a note to clients. "Fading headwinds from traditional bundles and emerging tailwinds from new bundles should moderate cord cutting and increase content pricing power."
Swinburne wrote that he prefers distribution to content stocks, adding that accelerated revenue is coming from three drivers: the exit from an “unprecedented” consolidation period among distributors; the emergence of new and future streaming video entrants and robust demand for existing OTT services.
Swinburne estimates that new streaming services will add about 5 million customers between 2016 and 2020, while current over-the-top offerings like CBS All Access and standalone OTT products like Starz’ Showtime and HBO Now ended 2016 with more than 10 million subscribers (excluding Netflix, Hulu and Amazon Prime), which should help offset the impact of a dip in bundled subscribers.
Swinburne also predicts that the advertising market will continue on its upward trajectory in 2017.
“Valuation levels are defendable,” Swinburne said, noting that media stocks trade below cable and the S&P. He added that tax reform “could be an additional tailwind.”
On the programming side, Swinburne resumed coverage of Viacom with an “overweight” rating. He upgraded The Walt Disney Co. and MSG Networks to the same level, joining movie studio and entertainment giant Lionsgate.
“We see [Disney] benefiting the most from new emerging streaming bundles,” Swinburne wrote. “We see continuing appreciation of content/IP in Disney (film outlook), MSG (nearly 55% discount to NAV), and Lionsgate. Finally, we see Viacom as a compelling risk/reward with an under-earning film studio and low-hanging fruit to improve its relationships with distributors.”