Sector Turmoil Calls Valuations Into Question

As the stock market continued to roil over the past several weeks, both analysts and investors tried to make sense of what appears to be a fundamental change in how cable stocks are valued.

After a major media meltdown Aug. 5-6 — every stock in the space was down at least 10% at one point — the sector plunged again on Aug. 20, with shares of big media companies like The Walt Disney Co., Time Warner Inc. and Viacom falling around 6% each. But while that earlier falloff was spurred by fears of increased subscriber losses from cord-cutting and skinny bundles and fears that affiliate fees could be affected, the most recent decline was in part built on that distress and a call by Sanford Bernstein media analyst Todd Juenger for a new valuation framework.

In a research note, Juenger said the market is valuing media companies as “structurally impaired assets” and warned that affiliate fees “are being put at increased risk.” He posited valuing cable stocks based on the sum of their parts, valuing the TV business on multiples derived from counterparts in satellite-TV, publishing and other sectors with declining subscriber fees or advertising displacement.

Several analysts struggled to make sense of the shifting tides. Wells Fargo media analyst Marci Ryvicker downgraded the Diversified Media group to “market weight” from “overweight,” adding that some value is shifting from content to distribution. MoffettNathanson principal and senior analyst Craig Moffett, who in the past has warned that continued cable losses were expected as cord-cutting gained steam, upgraded the cable distribution sector on Aug. 19 after it reported some of its best subscriber numbers in years.

Even Juenger — whose past warnings that ad-market declines were secular, not cyclical, proved to be correct — cautioned against playing extremes. Those who believe affiliate fees will rise should probably buy the stocks, he said, and those who believe cord-cutting will accelerate should probably sell.

“We believe it is more complex,” Juenger wrote.