UBS Says Sell CBS, AMC As Media Landscape Shifts

UBS analyst Doug Mitchelson downgraded CBS (CBS), Discovery Communications (DISCA) and AMC Networks (AMCX) to Sell, citing a deceleration in core national TV advertising and lower ratings as competition increases and consumers shift to on demand platforms.

WEAK ADVERTISING, RATINGS: UBS' Mitchelson downgraded CBS to Sell from Neutral with the company's shares trading above his unchanged price target of $52. The analyst believes that CBS has a healthy long-term outlook, in particular with pricing leverage over pay TV distributors and ability to drive retransmission consent revenue growth. However, he does not expect the macro backdrop to support continued TV advertising strength, with national TV advertising to decelerate in the second half of 2016. Mitchelson expects 2017 earnings per share growth to be held back by tough Superbowl and political comps and believes that investors should price in relative cyclical risk for both macro and network ratings.

NO NEAR-TERM UPSIDE: Also this morning, Mitchelson downgraded Discovery Communications to Sell from Neutral saying he does not see near-term upside for the company's shares with advertising spending likely to slow in the second half of 2016. Furthermore, the analyst cited concerns regarding skinny bundles, the risk to U.S. viewership as consumers shift to on demand platforms and due to increase competition, and the uncertainty regarding the shift to and cost of sports investments in Europe. Mitchelson lowered his price target on the shares to $24 from $30.

LACK OF CATALYSTS: Besides CBS and Discovery Communications, UBS' Mitchelson also downgraded AMC Networks to Sell on similar concerns and added that he is "increasingly wary" of the company's ability to diversify away from aging The Walking Dead as the show sees double-digit ratings declines alongside another returning series, Better Call Saul. Furthermore, the ratings for freshman series like Preacher and Feed the Beast have been lackluster, Mitchelson told investors, noting that he sees no near-term catalysts able to resolve these concerns. The analyst also noted that he believes AMC Networks will not be included in Hulu's new online pay TV service and expects that the cost of ramping its originals slate will precede monetization, suggesting difficulty growing margins. Mitchelson lowered his price target on AMC Networks' shares to $57 from $67.

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