FOXA - BofA examines what a recession would mean to cable media stocks

A look at a potential recession on the media and cable sectors has BofA seeing the same cracks in the ad market as other firms, and revisiting the traditional view of cablecos as defensive stocks in tough times.

Share prices in the industry have meaningfully declined along with the broader market, analyst Jessica Reif Ehrlich noted - and media and cable stocks typically underperform the market 1-3 quarter before the start of a recession, and start to outperform the broader market 1-3 quarters before the recession ends, she said.

That underperformance is evident, she notes, with shares of the S5MEDA index down about 34% year-to-date (and down about 38% since peaking on Sept, 1, 2021), vs. the S&P 500 down about 20% year-to-date (after peaking on Jan. 4).

BofA economists suggest nominal GDP growth will slow in 2023 to 6.4%, "implying we are one revision away from a recession," Reif Ehrlich notes - but says even in the case of recession, indications are it would be relatively mild.

And that means the much-discussed declines in ad budgets may not be as bad as the recent COVID-related recession, she says. "It is our expectation total advertising budgets would decline modestly with streaming/advertising video on demand (AVOD) revenues still growing (though more modestly), while linear advertising revenues would be most susceptible to declines."

Among the stocks BofA covers, the most direct ad exposure falls on iHeartMedia ( IHRT ) - where ads made up 89% of calendar 2021 revenues - Fox ( FOX ) ( FOXA ), with 42% of revenues, and Paramount ( NASDAQ: PARA ) ( PARAA ), with 40% of revenues.

Those with more limited advertising exposure are Disney ( NYSE: DIS ) at 17% of revenues and Warner Bros. Discovery ( NASDAQ: WBD ) at 21%, though they would benefit from a strong market, and they have other drivers going for them. Of the ad-heavier stocks, Fox may be insulated somewhat because of Super Bowl and political ads, she noted.

Speaking of Disney ( DIS ), theme parks are roaring back thanks to some pent-up demand - though with theme parks correlating strongly with unemployment rates, "if macro conditions deteriorate, we anticipate pressure on attendance and theme park revenues," Reif Ehrlich said.

Still, even some U.S. weakness could be mitigated by the return of still-underrepresented international visitors. Disney ( DIS ) has the highest exposure there (29.3% of calendar 2019 revenues), followed by Universal and Comcast ( NASDAQ: CMCSA ) - 5.7% of total 2019 revenues, and 18% of NBCUniversal's.

As for cable - and companies including Comcast ( CMCSA ), Charter ( CHTR ), Altice USA ( ATUS ) and Cable One ( CABO ) - that space has usually been seen as defensive for recessions, but now increased competition should drive slower net add growth and accelerated cord-cutting, or at least force more promotional pricing, Reif Ehrlich noted: "We believe this backdrop challenges the traditional perception of Cable companies as safe havens during an economic downturn and struggle to find a near term catalyst."

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