NEW YORK (Reuters) - Lehman Brothers cut the stock ratings on Monday of Walt Disney Co, Time Warner and other top entertainment companies, fearing the television and film industry could suffer the same battering as the music business.
“To be clear, our fear is that the damage that digital distribution inflicted on the music industry will replicate itself in the movie industry, and our fears are too great to justify keeping neutral or positive ratings on the creators and distributors of movie and TV content,” analyst Anthony DiClemente wrote in a research note.
Along with Disney and Time Warner, Lehman lowered its ratings on News Corp and CBS Corp on concerns about “structural changes that appear destined to impact the core revenue and profits of (the) entertainment business.”
Lehman maintained its rating on Viacom Inc., but nonetheless cut its price target on the stock. It also lowered its overall view of the industry to “negative” from “neutral.”
Shares of all five companies were down — to various degrees — in early trade on the New York Stock Exchange.
DiClemente added, “In reality, while there are many obvious differences between music/audio and movie/video media forms, the core properties of video distribution and consumption are not different enough from music content to continue to justify why movie/TV content will be spared fragmentation.”
Specifically, DiClemente argued as consumers shift to new types of media — movie downloads, for instance, or TV video recorders that make it possible to skip commercials — the big entertainment companies will struggle to replace traditional sources of revenue.
“We believe fragmentation of media as a result of technological change is highly likely to disrupt the economics of traditional forms of movie and TV distribution,” he said. “Content may no longer be king in the entertainment business.”
Take DVD sales, for instance. DiClemente cautioned that it appears the rate of revenue decline from the DVD business will outpace any growth from the digital side.
DiClemente also cited specific trouble spots each of the companies.
Disney, he said, must contend with economic problems that could hurt theme park results; an ABC TV network that faces headwinds; and a stock price that is already at a premium to its peers. He cut Disney to an “underweight” rating with a $29 price target.
News Corp faces exposure to a depressed newspaper business; its Fox TV network remains challenged; and acquisition risk is a major concern, he said. It was cut to “equal weight” rating with a $15 price target.
Time Warner’s additional problems include concerns about future capital allocation of a special dividend from Time Warner Cable; plans for its Time Inc unit; and questions about AOL. DiClemente cut the rating to “equal weight” rating with a $14 target.
He cut CBS to “underweight” and a $16 target because of added concerns about CBS Radio; structural and cyclical weakness at the CBS TV network; and acquisition risk related to its purchase of CNET.
While Viacom’s price target was cut to $32 a share, it maintained its “equal weight” rating because of the possibility of incremental contributions from the “Rock Band” video game; international expansion; and the likelihood that affiliate fees will provide some stability.
In early trade, shares of Disney fell 43 cents to $30.47, CBS fell 42 cents to $18.10, Time Warner fell 34 cents to $14.64; News Corp fell 5 cents to $14.51; and Viacom fell 14 cents to $29.53.
Reporting by Paul Thomasch; Editing by Derek Caney