The focus shifts to media companies week as earnings reports are expected form Discovery Communications
(CMCSA), Time Warner
(TWX), Time Warner Cable
(TWC), Scripps Interactive
(CBS), and Viacom
(VIA). Several smaller media companies also report. The rest of the major entertainment, cable, and satellite companies report next week so this week’s new flow is likely to set the table for the near- and long-term for media investors.
In the big picture the fundamental focus will be on advertising trends, foreign exchange, intentional growth, subscriber statistics, affiliate fees, and programming expense growth. The multichannel TV industry business model is also going to be a focus with discussion surrounding Aereo, affiliate fee negotiations and blackouts, and digital rights fees.
Advertising growth is going to remain positive but slower than in the first quarter. Scatter markets appear to have softened but not noticeably. Ratings trends at individual networks will again exert a large influence on specific companies. Political spending is kicking, possibly providing some upside to local TV station owners. Guidance could be confusing as the Olympics have a history of sucking ad dollars away from the non-televising networks. I remain bullish on ad trends but am concerned that third quarter domestic advertising growth guidance could disappoint investors.
Foreign exchange is going to hold down growth rates. Weakness in Southern European ad markets could also restrict international ad growth. The big entertainment companies will feel the most impact, except for CBS, which is primarily domestically focused.
Programming cost growth is going to be an issue for cable and satellite companies. I don’t think the trend of upper single digit annual growth is going to change but the many affiliate fee battles are keeping this issue alive. Content still has the upper hand but distributors might be taking a tougher stance. Most new deals are long-term and we have cycled through many networks and distributors. Despite the headlines, a bull case could be argued revolving around the development of a stable and predictable outlook for the entire industry.
Cable and satellite companies face a seasonally tough quarter with snowbirds and college students cancelling subscriptions. I think this is well understood by investors but big subscriber losses for cable TV could re-ignite somewhat dormant cord-cutting concerns. AT&T
(T) and Verizon
(VZ) had weaker sub adds which could be a boost for cable and satellite. Broadband, in particular, continues to shift market share toward cable. Investors increasingly see broadband as the cable industry’s lead product and a hedge against TV cord-cutting.
Many content companies are beginning to lap initial digital right fee payments from Netflix
(NFLX). In addition, Netflix itself is struggling with high content costs as one problem. Amazon
(AMZN) has stepped up but probably not as aggressively as investors thought would be the case a year ago. The Coinstar
(CSTR)-Verizon streaming service has yet to indicate its content budget or strategy.
Legal issues will be prominent in conference call Q&A. Aereo won it first round and its business model feeds into other big picture issues, especially retransmission fees and programming cost increases. The Dish Network
(DISH) Hopper trial is also on the front burner. Retransmission fees are again an issue as is advertising strategies.
Here is a brief look at the major companies set to report this week:
The focus at Discovery Communications is going to be on its international exposure. Discovery’s industry leading growth is driven by its broad international reach. Foreign exchange is going to take a bit out of growth. Weak European economies all may hurt. Discovery also could lose viewers to the Olympics given its female and family-friendly network lineup. I am staying long Discovery but hedged my position.
Comcast has avoided the messy affiliate fee battles by signing long-term deals with many network owners. The company is also hedged by its ownership of NBC Universal. Cable sub trends and pricing are likely to be a focus of investors. Olympic profitability, or lack thereof, and the potential impact on NBC’s fall programming will also be discussed. Comcast shares have been very strong, but I think more upside remains thanks to disciplined and improving capital allocation in favor of shareholders and a stable, albeit modest growth outlook focused on the domestic economy.
Time Warner is beginning to show some progress with improving ratings at its critically important entertainment networks. Programming costs to drive the improvement will be an area of discussion. The company is aggressive with share repurchases but could add leverage to buy back stock. There is also some lingering investor worry about the possibility of larger acquisitions. Sentiment is improving toward Time Warner shares. I am leaning toward going long into the report.
Time Warner Cable faces the same seasonality issues as Comcast. Programming costs are going to be a greater focus as the company owns no networks beyond regional sports channels. Time Warner Cable has been a leader in experimenting with pricing tiers. Insight into how consumers are responding will be important for the entire industry. The capital allocation story is a bit played out at Time Warner Cable but an update will surely be important to investors.
Scripps Networks has fixed its ratings issues at Food Network although HGTV is still struggling a little and Travel Channel is down sharply. Scripps is almost purely domestic which could be a benefit. Loss of viewers to Olympic programming could impact guidance. Tribune is making progress on its bankruptcy finally so an update on capital allocation including buyback of minority stake in Food Network is warranted.
DirecTV will give a glimpse into the competitive environment with Dish and cable companies in the US. Latin America has taken the growth mantle at DirecTV so sub trends, pricing, and general economic impacts in those markets will be the other major focus for investors. I remain long DirecTV due to the aggressive return of cash to shareholders and rapidly building asset value and cash flow in Latin America.
CBS is another domestically focused company. Tough comps will limit growth on a year-over-year basis. Margin expansion has provided big upside in recent quarters and should cushion the blow from tough comps. CBS has lots of local assets that will benefit from political. Comments on the sale of the Outdoor assets would be nice but probably unheard. I still see CBS shares as undervalued as the business model has shifted toward stability and predictability thanks to retransmission fees. The P-E multiple has not shifted as much, providing upside.
CBS, Comcast, DirecTV, and Discovery Communications are net long positions in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, and related technologies. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in the Funds’ investment management company, and has personal monies invested in the Funds. CBS and Discovery Communications are widely held by Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a long only registered investment advisor.
This column was previously published by SNL Kagan on www.snl.com.
Viacom’s issues are all about ratings. Ad growth is likely to be negative in the US due to poor ratings at Nickelodeon. International ad growth will take hit form foreign exchange. Viacom will have the worst ad performance in the industry. Investors understand this and the stock has severely lagged its peers. Understanding future ratings fixes and programming expenses to drive them is going to be focus of the conference call.
No positions in stocks mentioned.
Entermedia is a long/short equity hedge fund focused on media, communic=
ations, and related technologies. Steve Birenberg is co-portfolio manager o=
f Entermedia, owns a stake in the Funds' investment management compan=
y, and has personal monies invested in the Funds. CBS and Discovery Communi=
cations are widely held by Northlake Capital Management, LLC, including in =
Steve Birenberg's personal accounts. Steve is sole proprietor of Nort=
hlake, a long only registered investment advisor.
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