Navigating the headwinds and tailwinds of 2017; Top picks: ITV, JE/, PUB, RELX, SPR, WPP
1) any potential investor rotation from ‘bond proxy’ stocks to value,
2) news flow around and the outcome of political elections (e.g. in France, Germany, Netherlands),
3) any impact from previous major events (Brexit, Trump), and
4) as always, overall health of the economy in different countries. That said, our analysis in this reports suggests that while top-down themes will be influential, stock-specific factors will continue to be more important. Our top picks are Springer, ITV, JUST EAT, Publicis, RELX, WPP (all OW). Our least preferred stocks are Wolters and Lagardère (UW).
* Top-down vs bottom-up drivers:
1) Top down: Looking at the correlation of stock price performance with the direction of bond yields, we found little
consistent direction of correlation over time; stocks within sub-sectors with similar profiles (e.g. cyclical free TV or defensive professional publishers) often performed differently. While we expect the direction of yields to influence stock performance, we conclude that fundamentals remain more important. Second, we looked at the correlation between GDP/consumer sentiment and ad growth for FTA TV and Ad Agencies. We found that a)consensus NAR expectations imply upside for ITV (JPMe -3% vs. cons -5% in 17E) but appear full for ProSieben (at +2% NAR). In the context of +3.4% global GDP growth in 17E, expectations for WPP/PUB also appear conservative.
2) Bottom-up themes we expect to drive the sector in 2017 include M&A (e.g. next moves by VIV), self-help (e.g. any disposals by SPR), restructuring plans (e.g. PSON, INF), EPS upgrade potential (e.g. RELX on the back of Risk’s accelerating performance), and as always, attractive valuation (WPP; Publicis, ITV).
* Our top picks:
1) While Brexit is an obvious risk, ITV shares are cheap (12.5x 17E P/E) on low expectations, Studios rev growth should be better in 17E (e.g. two series of Hell’s Kitchen), and our economist recently upgraded 17E UK GDP forecast by 0.3ppt. 2) RELX is accelerating its organic revenue growth (from +3% to +4%) with the move to more sophisticated products, has balance sheet capacity for bolt-ons/buybacks, and trades on lower multiples than other defensives.
3) We believe PUB and WPP are competitively well positioned vs consulting companies, that their organic rev growth is more resilient than perceived, and the stocks offer high Eq FCF yields (8.5% and 7.6% 17E, respectively).
4) We expect takeaway food and JUST EAT to prove more resilient than expected, and see the company
continuing to deliver top-line growth well above any other stock in the sector.
5) For Axel Springer, we see attractive valuation (10.8x 17E EV/EBITDA) and a turnaround in EBITDA growth (+10% pa 16-18E).
* We downgrade several stocks on valuation grounds: From OW to N for AUTO, M6, UBI and VIV; from N to UW for MMB.