The tried-and-true method of using a price-earnings ratio to determine the potential for a company’s stock may no longer apply to TV networks.
If you are to believe Todd Juenger, a senior analyst at Bernstein, P/E ratios don’t take into account the debt these networks are taking on.
“One thing you will never, ever hear us say is: ‘the stock trades at a below-market P/E and is growing EPS faster than the market, so you should buy it,'” Juenger said in a research note.
“We are only interested in valuation metrics that consider cash flows/earnings to the entire enterprise -both equity holders and creditors. P/E does not.”
By changing to an enterprise valuation (a company’s total value) over earnings before interest, taxes and amortization – or EV/EBITDA – method for evaluating companies, you can take into account more than just the earnings per share.
So what does this new method mean for TV networks? Mostly bad news.
Using EV/EBITDA instead of P/E led Juenger to lower his price targets for CBS, Discovery, and Walt Disney. Additionally, the lowered target also led to a downgrade for Discovery from market-perform to underperform. The downgrade was a result of the company increasing its leverage at a time when its EV/EBITDA is much higher than its peers.
Two of the higher performing media stocks year to date, CBS and Scripps, are likely to remain flat through the rest of the year. Juenger says the stocks are market-perform now, but have a sunnier outlook beyond the 12-month mark because of their relatively higher EV/EBITDA ratios.
It’s not all bad news for this market, though.
“FOXA remains our only outperform name among the TV-centric media stocks, and it actually holds up even better on EV/EBITDA than on P/E,” Juenger said.
He raised his price target from $2 to $35, about 19% higher than Tuesday’s opening price of $29.44 per share.
If Juenger is right, it won’t be a good year for most of the TV networks. As cord-cutting continues and over-the-top video providers win awards for their programming, it might be time to reassess these companies.