Last week’s cautiously optimistic preview of media earnings
appears to have been reasonably accurate. Advertising growth slowed, but remains at an acceptably positive level. Cable and satellite subscriber trends were pressured by seasonality and programming expenses, but continue to show reduced video sub losses and no sign of cord cutting. Foreign exchange is hurting results, but this is well understood and not a major concern. Legal issues surrounding Aereo and the ultimate impact on retransmission revenues for broadcasters has been a topic of discussion, but less so than I expected.
Reported results have mostly closely matched estimates on financial and subscriber metrics. Given worries about slower economic growth and weak consumer confidence, in-line earnings are positive for investors. More bullishly, management teams seem remarkably confident when looking to the second half of the year given all the uncertainties in the economic, political, and fiscal policy environment.
Confidence for TV network owners emanates from political advertising, retransmission fees, and higher priced upfront ads that will begin airing in September. Cable and satellite company confidence is tied to better seasonality, a bottoming in housing, and stable ARPUs that are supportive of a benign competitive environment.
There are still a bunch of companies yet to report across the media landscape, but so far the results are supportive of continued gains for media stocks, one the market’s big winning groups so far in 2012.
Here is a look at company-specific comments for the larger cap stocks that reported last week. Comments are in order of company reporting dates.
As expected, Discovery Communications
(DISCA) saw a slowdown in growth thanks to foreign exchange and weaker ratings at leading US networks Discovery and TLC. Management suggested the growth deceleration would continue in the third quarter before results pick up in the fourth quarter. With a well-deserved premium multiple, Discovery shares are likely to pause until ad growth accelerates or ratings improve.
(CMCSA) had another outstanding quarter. Tighter management of the core cable business continues to produce industry leading growth. Free cash flow growth continues to shine as capital spending falls as a percent of revenue. NBCU could still use improvement, but the company is cleaning up minority holdings and building cash ahead of the first buyout of General Electric’s
(GE) remaining stake in 2014. Comcast shares still have plenty of upside despite a gain of almost 50% this year.
(TWX) reported as expected results with some slights hits and misses. Heading into the quarter, I was noticing a change in sentiment toward the shares for the better. The stock has rallied $3 since reporting, reinforcing the new bullishness. Had the company reported this quarter a year ago, the shares would have been little changed or lower. Continued progress on ratings at TNT and TBS is helping. The biggest positive coming from the quarter was a very aggressive double-digit growth forecast for affiliate fees beginning in 2014. This is the payoff from higher profile programming like the NCAA Basketball tournament.
Time Warner Cable
(TWC) followed Comcast with in-line numbers. Despite a seasonally weak quarter, like Comcast, the company reported improved subscriber metrics compared to a year ago. A firmer commitment to what has already been a massive capital return program has boosted bullish sentiment for the shares.
(SNI) was a big winner with industry leading ad growth and strong signals that no slowdown lies ahead. More share repurchase, with management stating that a buyout of Tribune’s minority stake in Food Network is not an obstacle, is a positive sign. The company adjusted some expense lines higher, but with ratings and revenues responding, the investment seems worthwhile. For now, Scripps has replaced Discovery as the favored stock among pure play cable networks.
(DTV) reported weak US results including a first-ever loss in subscribers. Management had telegraphed this, however, so the damage was limited. In fact, other subscriber measures like ARPU, acquisition costs, and churn, suggest that management’s plan to slowly grow and harvest the US business is on track. Latin America again surprised to the upside and remains the engine of growth for the company. Aggressive share repurchase supports the shares, but a boost in US growth or a leveraging of the LatAm business to accelerate share buybacks is necessary for the stock be a media industry leader again.
(CBS) continued its string of positive surprises with operating margins again surprising way to the upside. Les Moonves and his team have done a fantastic job of diversifying into high margin, non-cyclical revenue streams. CBS looks more and more like its peers that own cable networks even with only Showtime under its ownership. A focus on content continues to drive the story. The stock still has upside to get to parity with other entertainment companies, and it remains one of my top picks.
(VIA) wrapped up the first big week of media earnings with a weak report. Advertising was -7%, massively trailing expectations for a low single-digit decline and peer companies that reported mid-single to double-digit gains. The street seemed to take a “the bottom is here” view. That might be true given that the drop in ratings began last fall. I still see Viacom as a laggard and will until I see consistent, concrete rating gains at Nickelodeon and MTV. Viacom shares are up 5% since the report. There is no better sign of the bullish sentiment toward media stocks.
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 adviser.
This column was previously published by SNL Kagan on www.snl.com.
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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