Media companies starting with Cablevision Systems this week begin reporting their earnings for the third quarter, and analysts are expecting a better performance than either the economy or stock market would suggest.
While concerns about economic conditions and debt levels have roiled Wall Street, revenue for media companies seems to have remained strong. This is particularly true of advertising revenue, which appears to have been robust in the third quarter and looks to remain solid at least in the fourth quarter.
Third-quarter results and the fourthquarter outlook for the media “will likely bear little resemblance to the [macroeconomic] upheaval suggested in this summer’s market activity,” said David Bank, analyst at RBC Capital Markets in a recent report. “We expect most media conglomerates to report advertising growth in-line with prior guidance.”
The biggest variable in the earnings from company to company is over-thetop digital content distribution revenue, as some companies have made major deals with Netflix, Hulu and Amazon while others have not. Revenue from these deals tends to be fairly high-margin, so it has a big impact on quarterly profits.
Analysts really liked the recent deal CBS and Time Warner made, selling shows from The CW to Netflix. “Kudos,” said David Joyce of Miller Tabak + Co. “A positive for CBS and Time Warner as they add high-margin digital syndication revenue here.”
On the downside, some companies, including Viacom and Scripps Networks Interactive, have already indicated that ratings problems at some of their networks will hurt advertising growth in the quarter.
Laura Martin, analyst at Needham & Co., recently issued a report maintaining her 46 cents a share earnings estimate for CBS. “We believe CBS’ current ad spending environment is stable and demand is solid at both the local and national level,” Martin said. “We believe the advertising market continues to be robust at both the local and national levels for CBS.” Martin has a buy recommendation on CBS.
On the other hand, Martin lowered her revenue estimate for News Corp. by 0.5% for the company’s fiscal year 2012, which began in July. The revision reflects “less aggressive growth assumptions in the cable network division,” Martin said. But for the third quarter, she expects the News Corp. cable networks group to report 12% growth in revenue to $2.09 billion.
According to Anthony DiClemente of Barclays Capital, Scripps Networks Interactive’s ad revenue growth is expected to slow in the third quarter, but management anticipates it improving in the fourth quarter. “Still, we remain guarded on ad growth upside, given ongoing ratings softness at key networks,” DiClemente said. On the upside over the longer term, he noted that “affi liate rates are well-positioned for increases as deals come due in coming years.”
RBC’s Bank lowered his target price and earnings estimate for Viacom, citing somewhat softer-than-expected ratings (mostly at the non-flagship networks) “[which] led management to lower F4Q11 domestic ad growth guidance recently [from double digits to high singles].”
Industry wide, Bank found that scatter ad prices in the fourth quarter are commanding 5-10% premiums over what was a strong upfront. Partly because of that strong upfront, “overall demand is lower [though still stable],” he said.
Including the NBA lockout, which is preventing the season from beginning on time for Disney’s ESPN and Time Warner’s TNT, and on top of a fairly normal audience erosion pattern, “we believe that the scarcity of inventory is allowing a firm price floor for inventory to clear at, but a lack of demand for that inventory likely limits upside opportunity. We are simply [making comparisons] to a more buoyant market in the fall of 2010 [versus a more cautious 2011],” Bank said. “We believe this environment could lend itself to a modest uptick in cancellation activity for 1Q12 as option deadlines approach in November. The scatter premium over upfronts could represent a very modest cost for flexibility, even if there is a decent likelihood that money comes right back into scatter.”
Bank added that the outlook for 2012 national TV spending was still solid, particularly for cable.
“Once again, we believe that ratings will be the key driver for companies to differentiate themselves, suggesting News Corp.’s FX could be a real standout in 2012,” he said. “However, we also believe operators will be able to drive outperformance through the substitution of premium advertising for direct response [i.e. Scripps Network’s Travel Channel] or through the addition of new advertisers, allowing emerging networks to dramatically increase prices over prior rate bases of early advertisers [i.e. Discovery’s ID].”
As for Cablevision, Morgan Stanley’s Benjamin Swinburne lowered his price target on the cable operator to $20 a share from $27 and cut his free cash flow estimate for 2012 to $1.88 a share from $2.10 because of heightened competition. “We believe, given Verizon’s aggressive offers in the market, continued economic weakness and recent increases in high-yield spreads, the company may opt to slow its repurchase levels down and move towards the lower end of the range,” Swinburne said.
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