A new Wells Fargo Securities report gives linear media a big boost, while lowering expectations for the software industry.
It has much merit, given the financial institution’s track record on coverage of broadcast media companies with publicly traded shares. And, the report provides media executives with further ammo in their fight against local digital.
In a significant sector call released Thursday (8/26) by Wells Fargo Bank, a downgrade of the software industry to “Underweight” was seen.
Concurrently, the “Media & Entertainment” industry, which includes radio and TV companies, was boosted to “Overweight.”
Wells Fargo explains that the basis for the changes are thanks to “technicals, valuation and earnings revisions.”
It’s intriguing, as the Software sector has done well in 2021, recovering by 30% since mid-March and outpacing the market by more than 15%. However, Wells Fargo Securities Head of Equity Security Christopher Harvey, joined by analyst Gary Liebowitz, believe a premium valuation of the Software arena is “hard to justify when we see attractive alternatives and a potential shift in the market’s risk appetite.”
The rally so far has pushed Software to a 75% premium in forward price/earnings vs. the overall market. Uh-oh: they say that’s comparable to 1999-2000, right before the early 2001 “dot-bomb” implosion that wreaked havoc on Silicon Valley in the months before the 9/11 terrorist attacks.
With Software “too expensive for our tastes,” the Wells Fargo Securities analysts took a closer look at Media & Entertainment. As they see it, the industry is having a “bang-up year.” Since a company-classification sector reshuffling a few years ago, M&E has underperformed Software by some 50%. Further, Harvey and Liebowitz notes that the M&E group only trades at a 15% price/earnings premium to the market. However, the growth rate is increasing and revisions are strong, suggesting rapidly improving fundamentals.
Another plus, the analysts note: The risk profile in Media & Entertainment is lower than that for the Software industry. With the M&E group “oversold,” this boosts the opportunity for a near-term bounce.
Which Media & Entertainment names does Wells Fargo rate at Overweight?
The biggest subsector that it’s recommending is Broadcasting, and nine names make the cut,
They include Discovery Inc., FOX and ViacomCBS.
But, Wells Fargo also brings “Overweight” ratings to Audacy, iHeartMedia, Nexstar Media Group, The E.W. Scripps Co., TEGNA and Hispanic market specialist Hemisphere Media Group.
Of the companies listed above, Wells Fargo gushes over Audacy, the struggling audio media content creator and distributor that owns Cadence13 and Pineapple Street, has a partnership with BetQL, and continues to face obstacles in fully realizing its tax-free merger with CBS Radio.
With Thursday’s Opening Bell on Wall Street, Audacy shares were at $3.38 and trending downward through early morning activity. Wells Fargo has a price target of $7 on AUD.
The team as Wells Fargo, meanwhile, sees a 60% upside in Discovery by offering a target price of $46. It opened today’s trading at $28.74 per share.
Wells Fargo also offered three picks in the cable and satellite sector: Cable One, Spectrum parent Charter Communications, and Sirius XM Holdings.
