Morgan Stanley
  • Research
  • Feb 8, 2017

Media Stocks: Time to Tune Back In

Long the portfolio laggard, the media sector is now riding the tailwind of several trends that could lift TV-centric media stocks by as much as 25% in 2017.

For investors who cut the cord on media sector stocks these past couple of years, now may be good time to reconnect.

Media, from cable-satellite and entertainment to advertising, has experienced plenty of disruption, as consumers flocked to online offerings, and advertisers followed. Yet, a combination of improved prospects and relatively low valuations suggests that the sector has adequately priced in the risks, with some of the largest content producers offering compelling growth stories.

Unprecedented consolidation among media companies has led to significantly lower distribution fees and improved prospects for new streaming offers in 2017.

In fact, some media stocks could rise by 15% to 25% by year-end 2017, according to Media Analyst Ben Swinburne, in a recent report. “Fading headwinds from traditional subscription bundles and emerging tailwinds from new bundles should moderate cord cutting and increase content pricing power," he says. Swinburne and his colleagues outline why these strengthening fundamentals bode well for the group and how new trends could even expand media’s reach.

Pay-TV Subscribers Stabilizing

Why the new positive outlook? Unprecedented consolidation among media companies has led to significantly lower distribution fees and improved prospects for new streaming offers in 2017, Swinburne says. This is likely to drive incremental adoption of pay-TV bundles in the U.S.—winning over the “cord never" crowd and converting basic cable customers to higher-value packages.

This year could mark the end of a 0.4% annual slide in domestic pay-TV subscribers, says Morgan Stanley Research, which is projecting a 0.4% annual growth in pay-TV subscribers through 2020. No doubt, all-or-nothing cable packages and the lack of choice for cable viewers helped spark demand for online-only media companies over the previous decade. Going forward, new Internet-based and virtual multichannel video programming distributors are better poised to win subscribers and boost earnings growth over the next four years.

“In aggregate, our forecast for improving total linear traditional TV subscribers implies pay-TV penetration declines moderately," says Swinburne. “This suggests potential for TV networks to see accelerating revenue growth and, in some cases, realize estimates ahead of expectations."

Key Advertisers Still Like TV

These days, no media sector can improve without corresponding strength in advertising. Traditional TV experienced a broad decline in advertising following the recession, while losing share to emerging digital platforms. In time, big brands—particularly in consumer packaged goods, and food and beverage—returned to TV, seeking a higher-end brand experience and better return on investment. Meanwhile, pharmaceutical brands and automakers never really left.

In fact, even after accounting for the typical surge in Olympics-related advertising in 2016, the top 10 TV advertisers continued to spend more on TV ads last year. One major consumer goods company, for example, grew its TV ad spend by 24% between 2015 and 2016. One of the largest U.S. automakers kicked up its TV ad spending by 14% over the same period.

After a slow 2014, overall U.S. ad spending has grown by 4% to 5% organically year over year. Morgan Stanley Research expects ad spending to increase by 4.7% in 2017 and 4.1% in 2018.

“We see a robust advertising year in 2017 and overall," says Swinburne, adding that live same-day ad growth is enough for media to outperform. “Recent measurement concerns in the online ad market may help TV's case near term."

Meanwhile, the media sector, along with other industries, has rallied recently on the promise of potential U.S. corporate tax reform later this year. While the impact would vary, overall, “we still see some potential upside in the group from tax reform," Swinburne says.

For more Morgan Stanley Research on the outlook for the media sector, ask your Morgan Stanley representative or Financial Advisor for the full report "Light at the End of the Cord: Upgrading Media to Attractive" (Jan 30, 2017). Plus, more Ideas.