Disney, Discovery, Fox: Which Stock Will Be Crowned The Media King?

Disney, Discovery, Fox: Which Stock Will Be Crowned The Media King?

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.

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