Media Earnings Take Center Stage This Week

By Steve Birenberg  JUL 31, 2012 4:00 PM

Amidst controversies ranging from the economy to legal battles to fights between networks and cable and satellite providers, media companies will begin reporting earnings this week.


The focus shifts to media companies week as earnings reports are expected form Discovery Communications (DISCA), Comcast (CMCSA), Time Warner (TWX), Time Warner Cable (TWC), Scripps Interactive (SNI), DirecTV (DTV), CBS (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:
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
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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