Even before the COVID-19 pandemic, secular trends didn’t bode well for traditional media companies. Cord-cutting triggered a decline in subscriptions and a loss of ad dollars to streaming services. One analyst expects no relief from the pressure.

The Ratings

RBC Capital Markets analyst Kutgun Maral initiated:

• A Sector Perform rating on Walt Disney Co DIS with a $110 price target;
• An Outperform rating on Discovery Communications Inc. DISCA with a $26 target; and
• An Outperform rating on Fox Corp FOXA with a $31 target.

The Disney Thesis

Disney’s parks, studio, and network face a significant headwind in the coronavirus, as lockdowns stunted theater and ride attendance, and advertisers cut spending. The pressure may continue in the mid-term as consumer spending remains muted. RBC anticipates downside throughout 2020 before operating income begins to recover in 2021 and trends return to 2019 levels in 2022.

“We are bullish on Disney’s strategic vision, quality of assets, and execution, but remain on the sidelines until there is greater clarity on the post-coronavirus world,” Maral wrote in a note.

He expects Disney to lead in the streaming wars, with its direct-to-consumer (DTC) operating income turning positive in 2023.

The Discovery Thesis

Discovery is similarly exposed to the decline in ad spend and pay-TV subscribers, but Maral appreciates its DTC opportunity, cost structure flexibility and gains in ad share abroad. He considers it a strong M&A target.

“Discovery’s core Pay-TV business is likely to continue seeing secular and cyclical pressures, but we believe its global DTC services are on a strong trajectory to scale and potentially support a rerating as the company demonstrates a credible path for subscriber growth and profitability,” he wrote.

By RBC’s calculations, Discovery should see equity upside as free cash flow (FCF) growth enables buybacks or deleveraging.

“Costs are expected to peak in 2H20/1H21, which should drive significant operating leverage from 2021 onward and support profitability with much lower subscriber levels than other platforms,” the analyst wrote.

The Fox Thesis

Maral expects Fox’s stock to outperform peers given its FCF conversion, strong balance sheet, and industry leadership.

“We view Fox as having the most attractive portfolio of traditional media assets across our coverage,” he wrote. “While we are cautious on the outlook for Pay TV, we see Fox’s must-have sports and news properties as being relatively well-positioned to secure carriage, drive robust affiliate pricing, and attract advertisers.”

Still, Fox is also exposed to ad disruptions and cord-cutting, as well as delays in sports seasons. Maral expects no buybacks until at least 2021.

“The rate of change is accelerating which could result in structural shifts in Fox's earnings power and ability to compete against traditional/digital competition (particularly in the context of the upcoming NFL renewal),” the analyst wrote.