Nielsen: Upgrading From Hold to Buy -- Pivotal Research

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We are opportunistically raising our recommendation on Nielsen from Hold to Buy. We think that investor sentiment is overly negative at this point in time, as fundamentals are not much different now than they were earlier in the year, but perceptions of challenges appear to be much worse. We maintain our $35 YE2018 price target, while upgrading our recommendation from Hold to Buy.

There are many negative factors understandably weighing on Nielsen stock. However, we think they are likely overdone as the long-term durability of the business remains in place.

For example, we think investors look at trends around national TV measurement through a negative lens. Open AP and other initiatives focused on expanding the use of non-age/gender-based metrics are commonly viewed as negative for Nielsen as there is a view that advertisers will reduce their reliance on age/gender-based metrics. We think this is not likely to occur broadly any time soon. We do see advertiser interest in complementing their age/gender-based targeting, but mostly as a means of prioritizing inventory that will be negotiated for and guaranteed on age/gender-based metrics. In other words, networks who want to sell to these advertisers will continue to rely on Nielsen’s data, as will agencies who service those marketers. If anything, there is potential for upside from the use of additional Nielsen services (such as NBI or NCS) in establishing complementary targets. These revenues will be incremental to existing revenues. Cord-cutting and cord-shaving are viewed as a threat, as is the pruning of network portfolios. Cord cutting and cord shaving is probably beneficial to the extent that incumbent network fees won’t change much, but upstart SVOD services and vMVPDs are becoming new customers. Further, for every minor network that drops Nielsen, it appears another one looks to capture national TV ad budgets through Nielsen measurement. The ongoing growth of digital media is also providing to be beneficial for Nielsen because advertisers generally pay Nielsen on a campaign basis. More campaigns on digital media mean more revenue for Nielsen.

The Buy side of the business is certainly facing more pressure, as the company’s core customer base has been looking for ways to reduce spending. However, we know that growth is still possible here based on data from the AMA’s newly released survey of US market research growth during 2017. While results were negative for one of the company’s primary Buy competitors, WPP’s Kantar, we saw significant growth from Nielsen’s other key competitor IRI, which expanded its business by +15%. This followed on growth in 2016 of +4%. Given a relatively similar customer base, we think that market share has been a factor for Nielsen. As it evolves its Connected System and other initiatives, and as customers undergoing zero-based budgeting exercises cycle through those efforts, we continue to expect that over time Nielsen can position this business to return to growth.

As for the catalysts that could cause an improvement in sentiment, we expect that as this year’s national TV upfront progresses, investors will come to see that the bulk of guarantees were once again established around Nielsen ratings. Further, as time progresses we expect that eventually more measurement of non-traditional ad-supported TV services will see light-of-day (these services are already measured, but data is not provided publicly by Nielsen), demonstrating the company’s relevance into the future. Buy businesses will probably require an actual resumption of growth – which should happen later in the year – for investors to alter their sentiment around that part of the company.

Overall, we think that investor sentiment is overly negative at this point in time, and expect that it will rebound. We maintain our $35 YE2018 price target, while upgrading our recommendation from Hold to Buy.

VALUATION: We value Nielsen with a DCF, using an 8.8% near-term discount rate, an 11.7% long-term discount rate and long-term 3.5% growth.

RISKS include macro-economic trends, the rising availability of less-expensive research solutions (which could impact Nielsen’s discretionary services) and the potential that Nielsen’s status as the provider of a TV advertising trading currency could be threatened.


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