Research firm Cowen cut its estimates and price targets on several traditional media companies, warning that the declines in their margins would intensify. Consensus estimates for the sector, which is being pressured by Netflix (NFLX) and Amazon (AMZN), remain too high, the firm contends. MARGIN PRESSURE: Among the TV networks covered by Cowen, the average earnings before interest, taxes, depreciation and amortization margin fell around 0.5 percentage points per year from 2013-2016, wrote Cowen analyst Doug Creutz. Their margin erosion will more than double this year, to nearly 1.38 percentage points, he predicted. The main factor causing the broadcasters' margins to weaken is decelerating revenue trends, as the TV networks' ad and affiliate revenue streams "have come under pressure," the analyst stated. ROOT OF THE PROBLEM: Creutz noted that he has had a negative outlook on traditional media "for a bit over three years." For many decades, the sector enjoyed very high operating margins. However, new TV broadcasters, including Netflix and Amazon, have helped break that trend by spending a great deal of money on content and accepting "low to negative" margins, he explained. Also eroding the margins of traditional TV are the Internet ads provided by Google (GOOG, GOOGL), Facebook (FB) and other Internet players, Creutz believes. The margins of traditional media companies "could fall for a very long time," warned the analyst. OUTLOOK: The analyst expects media companies' margins to fall another 0.75 percentage points in 2018 and in 2019. As noted earlier, he thinks that consensus estimates for the group remain too high. The analyst says that the sector's share prices reflect a 15%-20% reduction in the companies' margins "over the next several years." According to Creutz, such a scenario could play out, so it's impossible to say that the stocks "have reached deep value levels." TARGET CUTS, RATINGS: He cut his price target on Viacom (VIAB) to $31 from $41, on Discovery (DISCA) to $19 from $25, on 21st Century Fox (FOXA) to $29 from $32, on CBS (CBS) to $69 from $70 and on Disney (DIS) to $94 from $95. He kept an Outperform rating on CBS and maintained Market Perform ratings on all the other stocks named. PRICE ACTION: In morning trading, Viacom B shares lost 0.8%, Discovery fell 1.4%, 21st Century Fox A shares slipped 0.2%, CBS fell 0.2% and Disney advanced 0.1%.
