Has All The Negative Sentiment Over Cord-Cutting Turned Entertainment Stocks Into A Bear Trap?

Can media stock investors expect a great second-quarter earnings season?

No, according UBS analyst Doug Mitchelson, but it shouldn’t be disastrous either and there may even be hope for the future.

Investors are largely bearish, noting the seemingly unstoppable growth of non-traditional media outlets and slipping metrics for traditional TV companies.

Several traditional TV companies will be reporting earnings on July 27. Mitchelson estimates that they'll show a million lost subscribers, bolstering the argument that cord cutting accelerated in Q2.

TV advertising declined by 2.4 percent year-over-year. In Q1, it was down 1 percent year-over-year.

“Some media companies might miss 2Q EPS slightly and others report in line, but none are expected to materially beat,” said Mitchelson.

A Bear Trap? Perhaps Not

The analyst doubts that cord cutting was actually worse in Q2, going against a strong consensus.

“While 2Q17 earnings season could prove challenging, we suggest investors consider the risk/reward inherent in the group at these levels, especially into what we see as a favorable [Q3 2017] set-up,” said Mitchelson.

The analyst made note of five factors supporting his outlook:

• UBS’ 2017 EPS estimates are expected to hold where they are, unlike during the “2015 Media Meltdown.”
• TV upfronts beat expectations, indicating an improving advertising environment.
• The analyst sees 7-15 percent EPS growth across all his media coverage in 2018.
• After AT&T Inc (NYSE: T) buys Time Warner Inc (NYSE: TWX), some of the latter’s $80 billion market cap will “flow” to other stocks.
• Current media stock valuations are at the bottom of their two-year secular bear market trading range.

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