Analysts Initiate on Facebook, Get Bullish on News Corp, and discuss the Future of TV and Advertising - Wall St. Report 6/29/12

Read this week's Media Wall St. Report: Subscribers click here. To order your Jack Myers Media Business Report subscription,click here.

With the quiet period over, there was a deluge of initiation reports on Facebook (FB). The recent, massive social media IPO had been caught in a tempest of agitation around the IPO process, technology, and investment banking. Now, the spotlights on the stock itself and Wall Street is mixed in its admiration of the Internet juggernaut.

JP Morgan's Doug Anmuth emerged as the biggest bull on the stock. He believes the Street isn't giving the company enough credit. While everyone's looking at Facebook's first steps into mobile monetization, the analyst addresses investors' attention to the fact that the advertising platform is in the midst of a transition to becoming more social, ads are becoming more prevalent in the News Feed and the newly-announced Facebook Ad Exchange should "increase advertiser demand and inventory yield."

He also believes mobile monetization will be better than many people expect, forecasting it to be a $300M-$500M quarterly revenue opportunity as soon as 2013. JP Morgan expects re-acceleration of growth into 2013, with 3-year CAGRs approaching 33% for revs and 35% for EBITDA. Anmuth et al have an Overweight rating on the shares and a $45 price target.

Most other analysts admire FB's model but feel valuation is full. That's Credit Suisse's Spencer Wang's opinion, anyway. He believes the social network is well-positioned to capitalize on growth in the sector, which increasingly captures a large chunk of users' time spent online. 900 million monthly users may be a competitive advantage but Wang can't get comfortable with valuation, even if CS's own proprietary survey of advertisers found that FB's targeting capabilities is a key differentiator compared to competitors. He's Neutral on the stock with a $34 PT.

BMO's Dan Salmon was even more sanguine on the Facebook opportunity. He's uncomfortable with mixed agency opinion on Facebook's advertising from his channel checks. With user growth decelerating (he estimates 22% in 2013 and 16% in 2014), pricing power will be required to support valuation, and we believe this will be a challenge in light of industry-wide declines. In his initiation report, he admits he'd get more excited if FB rolled out rich-media/video ads. He launched his coverage with an ugly Underperform and a PT of $25.

News Corp

The other big news this week actually had to do with News Corp (NWSA). Word got out that Rupert Murdoch's firm was thinking about splitting itself into two companies, essentially separating its Entertainment group from its Publishing assets. Well, this move was approved early Thursday morning and Needham's Laura Martin used this opportunity to upgrade the stock.

She believes the spin-off could add more than $5/share of value. Beyond the structural benefit, the media analyst thinks earnings estimates are too low for 2013, undervaluing higher affiliate fees the media company has scored in recent negotiations. She's moving to BUY from Hold with a 12-month target of $27.

Drew Borst at Goldman Sachs likes the concept that "would sequester the secularly challenged, lower multiple Publishing assets from the faster-growing, higher multiple Entertainment asset." His new sum-of-the-parts analysis pushes up his PT to $25 (from $24). Additionally, Bo Tang at Barclays believes that this split should reduce the discount the holding company typically receives.

Charter Communications

Charter Communications (CHTR) introduced new pricing and packaging this week. Prices went down moderately for triple play packages, encouraging subscribers to order that package over double play. While Stefan Anninger at Credit Suisse said that the new packaging wasn't a surprise, they were introduced more quickly than the analyst expected.

He sees them as a net positive for four reasons: "(1) their more attractive pricing/features (e.g., more premium, faster HSD) should help to maintain some of the PSU growth momentum that we saw in 1Q12, (2) their greater focus on premium (and triple play sell-in) could lead to higher ARPUs over the LT, (3) their simpler structure (fewer packages) should benefit Charter's marketing and operations, (4) they reflect Tom Rutledge's (Charter's new CEO) expertise and experience in pricing /packaging."

DISH Network

CS's Anninger also published this week on DISH Network Corp (DISH). On Tuesday, Verizon and T-Mobile agreed to a spectrum swap that better aligns the firms' networks and fills in a number of markets where T-Mobile was either absent or light. The analyst believes this deal should act as a catalyst to further spectrum deal-making. This could spell upside for DISH, its AWS-4/S Band and its 700MHz spectrum.

Netflix

After months of being on the right side of the Netflix (NFLX) trade, Janney's Tony Wible is finally changing his mind. As we wrote about repeatedly in the Wall Street Report, the media analyst had been very critical of NFLX's business. He was right as the stock is down over 70% over the past 12 months and now, he's changing his rating with an upgrade to NEUTRAL on the shares. Wible believes the risk/reward is more balanced now, with increasing studio dependence on NFLX, slow competitive response, and near-term scaling of streaming margins. Though there aren't many near- term catalysts other than competitors getting their acts together (like CMCSA's StreamPix), he believes the stock is trading closer to its fair value, which he estimates to be $67.

T-Commerce

From T-Mobile to T-Commerce, Tony Wible and Janney hosted a conference call to discuss the potential of consumers buying through their televisions. While discussed for over a decade, it's only now that the environment has become conducive, as exemplified by TIVO's recent partnership with PayPal.

"We continue to see Smart TVs as portals for communication, search, social, and commerce. This will cause disruption for some but should be a growth opportunity for media. T-Commerce still has a long way to go, but it is clear that conditions are more favorable and ad buyer interest is increasing," he wrote in a note to investors.

Future of TV

Not to be upstaged, Laura Martin at Needham also published a 20-page report on the future of TV: who wins, who loses and what the economics look like down the pike. Because TV has always embraced technology, she doesn't believe the same fate awaits the industry as befell the music business.

There were some interesting data points that came out of the report including:

The average cable bill in the US for unlimited viewing is about $75/mo. With 8 hours of watching a day, that equates to about $0.30 paid per hour of TV watched.

The value of every lost 23 year old that NEVER subscribes to a cable, telco or satellite TV service when he/she first forms his independent household is approximately $54,000 of revenue to the TV ecosystem over their lifetime. 8-34 year olds did 79% of their TV viewing on live TV, 34-54 year olds did 86%, and over 55 year olds watched 93% of their TV live in 2011.

CBS

And the short of it is that Needham's Laura Martin believes CBS Corp (CBS) will play a big role in the future of TV. It's her top pick in the space and she believes that the firm's outstanding strategic position (#1 network), new revenue streams, digital devices, and international upside make it a Buy with a PT of $40.

U.S. Advertising Agencies

As macroeconomic concerns continue to weigh on investors, Michael Nathanson and Nomura updated their estimates for U.S. advertising agencies. Many U.S. agencies have significant business internationally and it appears that the original negative impact of FX estimated at the beginning of the year looks even worse now. For example the Brazilian Real is down 18% to the USD and the Euro down 11% in 2012. IPG (IPG) and Omnicom (OMC) both have over 50% of revenues generated overseas and Nathanson is bringing down expectations even further in the face of weakening currencies.

On the back of reduced revenue growth numbers, he also reduced his price target on IPG to $12 (from $13) and on OMC to $52 (from $55).

You are receiving this e-mail as a corporate subscriber to Jack Myers Media Business Report. Re-distribution in any form, except among approved individuals within your company, is prohibited. As a subscriber you have full access to all archives and reports at www.jackmyers.com. If you require your ID and password, contact maryann@jackmyers.com