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    Analysts’ Forecast – The Hollywood Reporter

    Streaming businesses are getting overhauled in the hope of reaching profitability down the line; the advertising market may be stabilizing but has been challenged; Hollywood writers are striking; record cord-cutting has further eaten away at TV networks divisions that once were the big profit centers; companies are going through layoffs to address “macroeconomic” clouds. To cut to the chase: it has been a challenging environment for entertainment stocks with few signs of compelling growth narratives and success stories.

    No surprise that investors are in this market keeping a particularly close eye on which possible gainers, or at least companies that can weather these rocky seas better than peers, Wall Street analysts are picking. At the mid-year point of 2023, some agree on Warner Bros. Discovery as their best bet, while others back other entertainment conglomerates, Netflix or Endeavor.

    The Hollywood Reporter sifted through at analysts’ top picks and favorite stocks in media and entertainment six months into 2023:

    Doug Creutz, TD Cowen
    Pick: Warner Bros. Discovery
    Why: Early this year, various Wall Street experts turned bullish on Warner Bros. Discovery, and some see it as a smart way to play market trends despite the stock’s gains during the first half of 2023. “Our turnaround thesis remains very much intact,” Creutz highlighted in a May report, also underscoring a positive first-quarter earnings development in the form of “management commentary, which includes expectations for U.S. direct-to-consumer profitability this year, a year ahead of schedule.”

    But the analyst noted that improving the financial momentum at the businesses acquired in the Discovery merger with AT&T’s WarnerMedia is the core driver of upside for the company led by CEO David Zaslav. “We believe the basic turnaround opportunity with the Warner assets is a more compelling investment case than any considerations with over-the-top,” he explained.

    “We do view management’s (streaming) strategy as more prudent and sustainable than peers’, and we also have faith in management’s ability to hit its synergy targets,” concluded the TD Cowen expert, maintaining his “outperform” rating with a $19 stock price target. “We believe shares should trade at parity or even a premium relative to peers rather than the current discount.”

    Benjamin Swinburne, Morgan Stanley
    Pick: Endeavor
    Why: Morgan Stanley’s Swinburne shared his latest sentiment on industry stocks in a June 21 report focused on sports investment opportunities. His takeaway: “We prefer sports assets that can compound both through asset value and free cash flow growth, including ‘overweight'(-rated) Endeavor, which we reinstate as our top pick in media & entertainment, Liberty Media – Formula One Group and WWE.”

    The expert explained his bullishness on Endeavor, on which he has a $32 stock price target, this way: “Its assets are benefiting from key secular tailwinds in media and entertainment, including sports. Endeavor’s sports exposure comes from its ownership of UFC, IMG, WME, OnLocation, live events (including two ATP 1000 tennis tournaments) and across its sports data & technology segment.” In aggregate, this should allow Endeavor to drive high single-digit to low double-digit adjusted earnings before interest, taxes, depreciation and amortization growth in the coming years, he estimated.

    Swinburne also sees Endeavor shares benefitting from “key catalysts,” including the close of the all-cash sale of the IMG Academy business, which the company indeed announced on Wednesday, and expected subsequent stock buybacks. “In addition, Endeavor shares should benefit from the writer’s strike being resolved and the closing of the TKO transaction with WWE.” Overall, he lauded Endeavor as a “play on premium talent, IP, and sports assets.”

    Jessica Reif Ehrlich, Bank of America
    Picks: Netflix and Warner Bros. Discovery
    Why: The analyst in a June 13 report, entitled “Sharing in the upside,” increased her subscriber and financial forecasts for “buy”-rated streaming giant Netflix, as well as her stock price target by $80 to $490, citing “improved growth prospects from password sharing.” She sees the company’s crackdown on password sharing as an upside opportunity that is “inextricably linked” to the firm’s new ad tiers.

    She now projects 18.7 million subscriber net adds in 2023, up from 13.7 million previously, and around 20 million net adds in 2024, up from 16 million. “This drives 2023/2024 revenue of $34.5 billion/$40.4 billion, respectively, and 2023/2024 earnings before interest, taxes, depreciation and amortization of $7.2 billion/$9.7 billion, respectively,” the expert detailed. Concluded Reif Ehrlich: “Supported by its world-class brand, leading global subscriber base and position as an innovator we believe Netflix is poised to outperform.”

    Warner Bros. Discovery is Reif Ehrlich’s other sector favorite. Things seem to be playing out in line with her comments in an April report when she wrote: “Despite the healthy share performance year-to-date, we remain very bullish on the long-term potential of WBD and view the current valuation as compelling.” Among the stock catalysts she identified back then are the combined Max streaming service and “incremental merger-related synergies.” 

    Steven Cahall, Wells Fargo
    Pick: Disney
    Why: In late April, Cahall called Disney a “signature pick,” “our top idea” and the “best opportunity in media,” with an “overweight” rating and stock price target hiked by $6 to $147. He hasn’t changed his mind since then.

    “We see the portfolio working increasingly together between franchise IP, sports and entertainment, buoyed by Disney Parks, Experiences and Products,” he argued, noting the role former and current CEO Bob Iger has played here beyond cost reductions, layoffs and a streaming strategy refocus. “We do not think Bob Iger’s tenure will be defined by portfolio shaping, but rather execution as Disney heads down this path.”

    As a result, the expert sees room for the stock to grow. “Disney is a large-cap stock that has been stuck at $100 per share. It’s under-earning outside of (theme) parks on its $30 billion annual content budget, hence our bullishness that costs are set to rationalize and earnings inflect,” Cahall concluded. “Disney is our top idea in media with about 50 percent upside potential.”

    Robert Fishman, SVB MoffettNathanson
    Pick: Fox Corp.
     “There has been a barrage of negative headlines related to Fox News over the past couple of months surrounding their $788 million Dominion legal settlement and subsequent, unexpected departure of Tucker Carlson,” Fishman acknowledged recently before emphasizing: “While we are not ignoring any of these impacts, we think despite these challenges the fundamentals and free cash flow story remain sound.”

    The analyst, who has an “outperform” rating with a $44 price target on the stock, highlighted that one “area of strength for Fox, especially relative to the position most other media companies find themselves in, is consistent, solid free cash flow.”

    Fishman also sees Fox doing better than its peers in another key part of the business. “The higher retrans rates from its and and operated TV station portfolio plus reverse comp from its affiliates ombined with future expected cable network increases lead to our stronger conviction that Fox should
    continue to reap better economics from the pay TV ecosystem than its peers, even as cord-cutting gets worse,” he wrote. “Fox’s peers should face increasing pressure as a result of leaking premium content (including the NFL) to their streaming services, often at promotional rates a fraction of their wholesale rates charged to (traditional distributors).”

    Jeffrey Wlodarczak, Pivotal Research Group
    Picks: Netflix and Liberty Media – Formula One Group
    Why: The analyst raised his stock price target on “buy”-rated Netflix from $425 to a Street high $535 on June 9, “mostly driven by an increase in our terminal earnings before interest, taxes, depreciation and amortization multiple … and to lesser extent the effects of increases in our free cash flow expectations in ’23 and beyond.” He described the global streaming giant as “a unique tech growth story given it remains well positioned to generate solid subscriber and revenue/free cash flow growth even in a potential global recessionary environment via their better monetization of the approximate 100 million-plus households that currently utilize Netflix outside of paying households via password sharing.” This should also be “enhanced by the subscriber and subscriber monetization benefits” from the company’s advertising-supported tier.

    For Formula One’s “buy”-rated stock, Wlodarczak has also touted a Street high price target of $85 and its trends under the ownership of John Malone’s Liberty Media. “Quite clearly Formula One is flourishing as anticipated under Liberty management, highlighted by continued record-breaking race attendance (36 percent higher than ’19 in ’22), important broadcast deal extensions in the U.S. and Europe with sizeable rate increases, the entrance of new engine suppliers, the decision to self-promote the Las Vegas Grand Prix (which should generate $500 million in revenue and be by far the most profitable race to Liberty when including both the race and the promotional returns), continued strong growth in social media/TV users/viewers and recent announcements from major new global/regional sponsors,” he highlighted in a May report.

    But the expert argued that investors have yet to catch up with Formula One. “The bottom line is that Liberty appears to be clearly ‘winning’”’ at reinvigorating the sport, and Formula One appears to be hitting on all cylinders, which we do not believe is fully reflected in the current valuation,” he concluded. “We also think the market underappreciates the potential to use the favorable Formula One tax structure to enter into accretive M&A that should benefit the sport (MotoGP being an obvious candidate which is currently owned by private equity), and if deals do not emerge, we expect Formula One will utilize significant excess liquidity and free cash flow to aggressively retire its shares.”

    Matthew Harrigan, Benchmark
    Pick: Warner Bros. Discovery
    Why: Harrigan, who has a “buy” rating and $26 price target on the stock, cites Warner Bros. Discovery as his current favorite among sector stocks, in May even publishing a report with the title “Direct-to-Consumer and Warner Bros. Now Executing versus Getting Executed.”

    Saying he was “encouraged” by the conglomerate’s first-quarter earnings report and management commentary, the Benchmark analyst pointed out that “a major positive development was $50 million in positive earnings before interest, taxes, depreciation and amortization for the direct-to-consumer business with expectations for 2023 U.S. profitability and confidence in $1 billion in 2025 global profits.”

    He also expects the investor focus to continue moving from 2022 post-merger restructurings to 2023 improvements. “Even as media companies and the equity market have taken a more rational view toward excessively streaming-centric strategies, Warner Bros. Discovery is pivoting from maiden-year restructuring initiatives toward a 2023 emphasis on relaunching and building its business.”

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