Bernstein Analyst: Media Companies Are Being Valued Like AOL

Shares of the major media companies have taken a beating since the beginning of August, when Disney revealed slumping subscription numbers and the prospect of an overall decline in pay-TV numbers.The price of Disney stock has dropped more than 15 percent since then and a new report out Thursday morning has sent the share prices of several other media companies dropping.

Sanford C. Bernstein senior media analyst Todd Juenger had previously downgraded shares of Viacom and Discovery and this note took aim at the future prospects of Disney and Time Warner. Juenger and his team of analysts argue that the industry's major revenue streams are in jeopardy, despite industry claims to the contrary:

Where the stocks/sector have traded historically is irrelevant. The world has changed too much. Where the stocks are currently trading may or may not be appropriate – but why?… We have come to believe the affiliate fee revenue stream deserves a higher risk premium than it did before. The question of whether pay-tv sub declines are accelerating is only a question of 'over what time frame?'

We believe the U.S. television industry is entering a period of prolonged structural decline, caused by a migration of viewers from ad-supported platforms to non-ad-supported, or less-ad-supported platforms. We favor companies that have the least exposure to U.S. advertising, the most exposure to sports, and advantaged positions internationally. But we fear the entire sector will struggle to work until the content owners take concerted action to reclaim on-demand viewing from the SVOD services and use it to protect affiliate fees.

The report goes on to target the prospect of declining subscriber fees and market concerns that the history of regular increases in subscriber and retransmission fees for the domestic TV networks is not sustainable:

When an industry is undergoing a massive structural upheaval, one major revenue stream is already impaired - and there are signs that a second one may be as well - investors won't wait for the final conclusive evidence to re-evaluate how much they are willing to pay for the existing status quo cash flow streams.

We believe the market is now evaluating domestic TV businesses similar to comps such as satellite TV, publishing and even AOL. All of these comps have declining subscriber fees and/or advertising displacement. Some have hopeful digital futures, but futures which look very different (and less stable and profitable) than the analog past. These businesses all tend to trade around 7x EV/EBITDA.

Juenger had slightly better news for Fox in the short term, although he believes the company cannot outrun the bad news facing the industry overall.

One indication of the challenges faced by the television industry is the continued weakening of the advertising market. Variety has estimated the five major broadcast networks nabbed $8.02-$8.69 billion for 2015-16 primetime entertainment shows. That is the third straight upfront that ad volume has dropped.

At 11:00 a.m. ET on Thursday, shares of Viacom, Disney, Time Warner and CBS are all down about 5 percent.