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As earnings season approaches, Wall Street remains upbeat about the TV business. Most of the stocks in the TV sector are already up sharply this year, even when compared to the 16% climb by the Standard & Poor’s 500. But analysts say the financial fundamentals for the industry remain strong, making them a good bet at the right entry point.
“We expect that 2Q earnings will reinforce our constructive view on the group, and we think most of our covered media companies will meet or beat estimates when results kick off,” said Anthony DiClemente of Barclays.
DiClemente sees several key reasons why the industry looks good, including that affiliate fees continue to grow “as pay networks maintain a high degree of pricing power,” that advertising revenue remains on an upswing and the scatter market consistently improves, and that media companies continue to “do the right thing” with excess free cash by returning it to shareholders in the form of stock buybacks and increased dividends.
Analyst Marci Ryvicker, in a research note, said that she’s done some checking up since the quarter ended and reports that, “the national ad environment does not sound as bad as some investors fear.”
Ryvicker says that while the upfront was softer than expected, that seemed to be more a result of ratings than of weakened demand. “At this point, we reviewed our models and felt comfortable with the majority of our ad assumptions,” which were up 3% to 9% for cable networks and anywhere between down 5% and plus 3% for the broadcasters.
DiClemente’s top picks in the sector are CBS, Viacom and Time Warner.
Clear Eye Vision
DiClemente notes that CBS’ stock has jumped 34% year to date on positive events. And, he added, “we continue to believe that fundamentals at entertainment remain strong.” He expects that CBS will increase its sub fees with Time Warner Cable, and that high ratings for the summer series Under the Dome “reinforces the health of broadcast TV distribution.”
The Barclays analyst also increased his price target for CBS shares from $52 to $60.
Ryvicker is also enthusiastic about CBS, raising her estimate for second-quarter earnings per share to 72 cents—even with the Wall Street consensus. “We feel good about CBS, particularly the entertainment segment when it comes to advertising and SVOD revenue. And we also believe confirmation of the outdoor [Real Estate Investment Trust] conversion process could be a positive catalyst for the stock.”
DiClemente said he’s also been recommending Viacom partly because it is returning so much capital to shareholders, but now he adds that its operations are getting better.
On its earnings call last quarter, Viacom CEO Philippe Dauman crowed about advertising revenue growth turning positive, adding that, “we expect to achieve further sequential improvement in advertising revenue growth in the current quarter.”
DiClemente said he’s expecting 4% U.S. ad growth for Viacom, compared to 2% last quarter. “We also think Viacom achieved higher pricing and volume in the most recent upfront, which bodes well for visibility of ad results into fiscal year 2014.” The analyst said he’s upped his price target for Viacom to $80 a share from $73.
High Time for Time Warner
As for Time Warner, DiClemente said it “continues to benefit not only from its enviable position as a scale player, but also from consistently improving margin at [its networks unit.]” Over the longer term, he says he’s confident Time Warner will be able to get the double-digit affiliate fee growth it’s seeking from cable operators starting in 2014.
Netflix faced investors and analysts via video last week, answering questions from BTIG analyst Rich Greenfield and TV news reporter Julia Boorstin. “We have always admired the fireside chat format at investor conferences,” explained CEO Reed Hastings.
Netflix increased its subscriber base and earnings, but not as much as Wall Street expected. It also disappointed some analysts by continuing to stay mum about viewership numbers for its original programming.
“We said publicly and continue to say publicly that we’re not releasing viewing numbers. Our actual ratings would be apples and oranges in comparison to what happens on a network,” Hastings said. The original shows “are hitting our numbers with remarkable precision in terms of what we forecasted enough, so that we had confidence to renew [new series] Orange Is the New Black, based on our viewing models even a few days before we launched the show.”
Netflix CFO David Wells added, “Every one of these shows are drawing TV-size audiences. So you know that House of Cards is a hit because when you walk in to Starbucks, people are talking about it. You know when the show is being spoofed at the White House Correspondents’ Dinner and 3,000 people are laughing at the slightest references to the show…. So without the precision of a number, you know that these shows are hits, too.”
Analysts were concerned about paying for programming as competitors like Hulu and Amazon threaten to push expenses higher. But Hastings said Netflix can keep the originals coming without selling stock or raising prices. “I think there is plenty of evidence that we can grow revenue faster than we’re growing content costs.”
