Hollywood strike may soon turn destructive for media stock investors, analysts say

Published Thu, Jul 20 20239:34 AM EDTUpdated Tue, Jul 25 20233:09 PM EDT

The labor disputes that have ground Hollywood productions to a halt will have wide-reaching implications for stocks across the media and entertainment space, particularly if the work stoppage is long lasting. The union representing actors, the Screen Actors Guild – American Federation of Television and Radio Artists, went on strike last week after failing to come to an agreement with the Alliance of Motion Picture and Television Producers, which represents studios. With the labor action, the union joined the Writers Guild of America, which has been on strike since May . The two unions, which together represent just under 200,000 workers, are withholding labor in tandem strikes that have essentially stopped TV and film production. It's the first time the two groups are on strike at the same time since 1960. Now Wall Street is warning that the strikes will spell bad news for investors in media stocks, even beyond just the parent companies of studios. "We're getting to a point of being very destructive to the entertainment ecosystem," said Rosenblatt Securities analyst Barton Crockett. "Everyone would be pretty well-served to resolve this quickly. And I'm a little bit not sure I understand why the studios have failed to pull this together." There's a lot at stake. Media and entertainment stocks have surged back to life this year after concerns of a softening advertising environment rattled investors in 2022. The S & P 500 media and entertainment group, which tracks studio parents, gaming and other stocks, is up about 50% year to date. Financial questions Citigroup analyst Jason Bazinet said in a note to clients last week that the addition of the actors makes the strikes harder to ignore, as scripts can be stored and developed in rainy-day situations, but actors are needed live. Bazinet said to expect the walkout to last into the fourth quarter, which would mean a writers' strike lasting between around 150 and 240 days and an actors' strike in a range of 70 and 160 days. If that's true, Bazinet said the 2024 box office could feel pressure from a lack of projects, pointing specifically to AMC , Disney , Warner Bros. Discovery , Paramount and Netflix as big industry names that could struggle. UFC operator Endeavor could also take a hit due to the firm's representation business, though its WWE actors are not part of SAG-AFTRA. Endeavor and WWE agreed to merge in April and the deal is expected to close in the second half of 2023. While revenue could be hurt by the lack of content in the pipeline, Credit Suisse analyst Douglas Mitchelson said last week that the strikes should have little effect on earnings before interest, taxes, depreciation and amortization. The stoppages could even boost short-term free cash flow with fewer projects to fund and employees to pay, the analyst said. Mitchelson, for example, raised his free cash flow expectations for Netflix as a result of the strike. But Netflix is probably an outlier. Goldman Sachs' Brett Feldman said Tuesday that for other companies, earnings become more uncertain the longer the strikes last. While some companies have said they have other content such as sports that doesn't involve affected union members to fill programming holes, they are still at risk of disappointing Wall Street because 2023 earnings expectations didn't price in the effect of the strikes. JPMorgan analyst Philip Cusick said the strikes could prompt Disney to either slightly cut or pull guidance for operating income growth. Beyond Disney, Cusick also warns broader profitability across the sector could be harder to assess as less content also curbs advertising. Particularly at risk of earnings declines are companies with higher exposure to original scripted content, such as Warner Bros. Discovery, Paramount, Disney, AMC Networks and Lions Gate , Goldman's Feldman noted. That's especially true if the strikes last longer than 100 days. While companies are aiming to squelch costs by resisting union demands, analysts noted they have reason to give in. The strikes could cost the film and TV industry about $150 million per week, Citigroup's Bazinet wrote, using inflation-adjusted data from the 1980 actors' strike. Though a large sum, he said it's manageable for the companies, as long as agreements can be reached by 2024. As the length of the shutdown is impossible to predict, Rosenblatt's Crockett said investors should focus instead on what the strikes say about which companies are winning and which are losing as the industry continues to shift toward streaming. "The lasting impacts are: [it] makes the streamers stronger and the traditional media companies weaker," Crockett said. "It's hopefully short lived, but each day it goes on is worse for traditional media than it is for the streamers." Media investment implications Crockett said early streamers such as Netflix are poised to fare better than traditional media conglomerates because of their ability to lean on international sourcing. Even with the effect of the strikes, Goldman Sachs' Feldman named Warner Bros. Discovery its top pick in the media sector , noting execution catalysts are mostly within the company's hands as opposed to being tied to broader cyclical trends. His $20 price target implies shares could rally more than 50% from where they finished during Wednesday's session. "While we expect investors to continue to debate the long-term outlook for traditional media companies, we see the risk/reward skew for WBD as most attractive vs. its peer group with key execution catalysts … largely within management's control," Feldman said in a note to clients Tuesday. Others were more hesitant to endorse WBD. Credit Suisse's Mitchelson, for example, recently lowered forward estimates for Warner Bros. Discovery, citing the soft upfront ad market and lower profits from TV during the strikes. WBD YTD mountain Warner Bros. Discovery's 2023 Wall Street insiders are also following how the strikes' ripple effects may hamper industry-adjacent companies. Platforms that focus on nonprofessional content, such as Meta 's Instagram Reels and ByteDance's TikTok, can win audiences from scripted movies or TV, Crockett said. Other companies with exposure to streaming, including Roku or Trade Desk , which focuses on marketing for streaming, could also get a boost, as could technology companies that help enable those platforms, such as Amazon , Google parent Alphabet and Apple . Despite highly anticipated upcoming releases such as "Barbie" and "Oppenheimer," Goldman Sachs analyst Stephen Laszczyk said the third quarter should bring in $1.9 billion for the domestic box office, down 4% from the same quarter a year ago and 34% from the same quarter in 2019, before the Covid-19 pandemic. JPMorgan analyst David Karnovsky downgraded movie theatre chain Cinemark 's shares to neutral from overweight earlier this week, citing the strike. Actors honoring picket lines and failing to market their movies could also hurt box-office performance for films slated for release in late summer or early fall. "Absent a resolution, we expect the strike will remain an overhang to CNK shares and limit upside regardless of whether the box office outperforms near term (e.g., Barbie and Oppenheimer) or the company posts better than expected results," Karnovsky said. Disclosure: Comcast is the parent company of CNBC and NBCUniversal. NBCUniversal is a member of the Alliance of Motion Picture and Television Producers. — CNBC's Michael Bloom contributed to this report.