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Analyst Sees Value Shifting From Content to Distribution

Bucking the conventional wisdom that content is king, analyst Marci Ryvicker of Wells Fargo Securities is downgrading media stocks and recommending pay-TV providers including Dish, Comcast and Charter.

“After going through one of the worst earnings seasons we have ever had outside of the Great Recession, it’s time to re-assess our entire coverage universe as clearly both fundamentals and sentiment have changed,” Ryvicker said in a research report Tuesday. “We can’t help but think some level of value is transferring from content to distribution.”

Ryvicker downgraded the entire Media sector to Market Weight from Overweight and downgraded CBS, 21st Century Fox and the Walt Disney Co. to Market Perform from Outperform.

She said Time Warner remains the only media stock she considers to still rank as Outperform in the diversified media sector because she expects its earnings to grow faster than its rivals—and says that’s before adding in any benefit from HBO Now.

Among the pay–TV distributors, Ryvicker says her favorite is Dish Network. She also likes Comcast as well as Charter and Time Warner Cable.

Media stocks tumbled two weeks ago as earnings reports raised investor concerns that on top of ad revenues remaining weak in the face of lower ratings and digital competition, pay TV subscribers are declining, threatening the steady strong growth in distribution revenue.

“We’ve clearly seen the fraying of the television ecosystem in ad revenue,” Ryvicker said. "What seems to have really shaken the market is the fact that we are finally seeing the fraying of the television ecosystem in affiliate fees – which is just tough, as subscription revenue is supposed to be the most stable and the highest margin of any media-type revenue stream.”