|TV Ads: What This Year's Upfront Selling Season Says About Media Stocks|
Ratings matter now, and that will lead to winners and losers.
It is the time of the year where media stock investors shift their eyes to the annual upfront selling season for network TV ads. Every spring broadcast and cable TV network owners present their program lineups for the upcoming fall TV season and sell ads to major advertisers. The upfront selling season provides a barometer for the health of the ad market which in turn impacts sentiment toward media stocks. The big players here are News Corporation (NASDAQ:NWSA), Walt Disney (NYSE:DIS), and Comcast (NASDAQ:CMCSA) (NASDAQ:CMCSK) which own a broadcast network and a stable of cable networks. CBS (NYSE:CBS) may be the most impacted as it only has a broadcast network and has the highest, though falling exposure, to advertising among the major entertainment conglomerates. Pure play cable networks influenced by the upfront include Viacom (NASDAQ:VIA), Time Warner (NYSE:TWX), Discovery Communications (NASDAQ:DISCA) (NASDAQ:DISCK), and AMC Networks (NASDAQ:AMCX).
Most of these stocks have done very well despite tepid ad markets over the past year. National TV advertising has been growing in the low single digits with plenty of supply in scatter market (spot market for TV ads) but pricing pretty strong, up double digits over the 2012 upfront for networks with decent ratings. Of course, there are not a lot of networks with decent ratings as the Wall Street Journal reminded us this morning in an early review of the 2013 upfront. With most networks having down ratings, advertisers lack ratings supply which pushed up prices for ratings available in the scatter market.
Current ratings winners include AMC Networks and Discovery Communications. Viacom is showing an improving trend off a very low base. CBS has weak numbers but remains on top among the broadcast nets, which is a distinct advantage when selling ads.
Expectations for the current upfront are low. The Wall Street Journal article suggested that broadcast nets would sell fewer ads than last year at higher prices, leading to a flat to very low growth environment. Cable networks could see mid-single-digit growth in total ad dollars with flat units and higher pricing.
One thing to remember about national TV is that it provides great reach for advertisers. This is especially true for broadcast networks which have decent ratings across much of their primetime schedule. Big national TV advertisers like auto, retail, entertainment, consumer packaged goods, and financial services want to reach tens of millions of households and consumers each week. TV remains the best place to do this, arguably the only place to do this, which explains why the upfront pricing rises each year and national TV advertising remains reasonably healthy despite challenges from changing viewing habits, lower viewing, and over the top Internet video. One thing has not changed, however. National TV advertising is very sensitive to broader economic trends and sentiment.
Heading into the upfront and all the headlines it will generate, I think the main message is that there will be differentiation in the results, and in the stock prices, based on recent ratings performance. For some time, I have written that the ad market cycle has matured from the “rising tide lifts all boats” mentality coming off the 2009 crisis lows. Ratings matter now, and that will lead to winners and losers. Keep in mind, however, that momentum in ratings matters so that a company like Viacom, can have a good upfront, as ratings performance is way less negative than it has been for the past 12 months.
Thus, I think winners in the upfront are likely to be Discovery Communications and AMC Networks. CBS will trumpet victory but ratings here are weakening despite management protests. For the financials, however, CBS should be okay. Investor sentiment could begin to suffer though if ratings don’t show better relative strength this fall. Viacom can also come out a winner as expectations are low and momentum is in the right direction.
Time Warner is similar to Viacom in that it is showing improvement but still not having great ratings. The stock has done real well, however, so I am wary in the short-term. I would use weakness to establish positions in Time Warner.
Disney is a bit of a different animal in that its ad supported cable and broadcast networks are dominated by ESPN. ESPN thrives on affiliate fees that support its expensive sports rights. Advertising matters, but less so. Furthermore, sports advertising is also somewhat insulated form larger ad trends due to the live nature of programming. Disney owns ABC, which is struggling with ratings and will probably have a mixed to negative upfront.
News Corporation has a strong stable of cable networks with solid momentum including Fox News, FX, and National Geographic. However, the FOX broadcast network is really struggling without new hits and American Idol in steep decline (but still one of the most popular shows on TV and one that advertisers buy for reach). I worry somewhat about the upfront for News Corp. but the larger story remains the cable network driven growth and the split of the company into TV and publishing arms. I think value remains in the shares.
I remain frustratingly short Scripps Networks Interactive (NYSE:SNI) where I see Food Network's struggles and a less aggressive capital allocation strategy as negatives relative to the group. The upfront headlines could go either way for Scripps but I believe the Street remains too optimistic toward the shares.
Finally, NBC’s renewed struggles are a negative for Comcast but cable still dominates the story for the shares. NBC is re-launching its most popular programming this week. If ratings for The Voice and Revolution come through, the pressure will be off NBC Universal and Comcast shares could rally. Other cable stocks have rallied more since John Malone endorsed domestic cable with his purchase of Charter Communications (NASDAQ:CHTR). Comcast could catch up.
Steve Birenberg is portfolio manager of Entermedia’s long short equity funds that are focused on media, entertainment, leisure, communications, and related technologies. Steve is also controlling shareholder of Entermedia’s investment management company and has personal monies invested in the Funds.
Positions in CMCSK, DISCK, CBS, News Corp., and DIS.
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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