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Market Struggles With Macro as Wall Street Turns Its Eyes Toward the Upfront


The stock market is having its first significant correction since last fall as worries mount about the global economic recovery.

The stock market has pulled back more than 5% off its 2012 high as the crisis in Europe remains unresolved, growth in China slows, and US economic data remains mixed. Another quarterly earnings season is mostly in the books but failed to provide a bullish spark. Results were mostly good but guidance was mixed relative to street estimates with just enough cautious management comments about the macroeconomic outlook to keep investors wary.

Media, entertainment, and communications stocks have acted a little better since earnings season passed. As outlined in several previous columns, the results and guidance commentary were quite solid. The stocks mostly initially sold off, however, as expectations were high going into the quarter. In addition, the macro concerns cited above set a poor tone for even the best earnings reports.

As time has passed, investors seem to realize that media and entertainment trends look promising. In particular, the box office is off to a very strong start in 2012 and national TV advertising is sustaining the healthy first-quarter pace. After the scare resulting from an unexpected and sharp slowing in the scatter market (advertising placed at the last minute) toward the end of 2011, the second quarter is merely holding steady with upper single digit average gains in the first quarter keeping media investors happy.

The decent tone of business is especially important with the upfront underway. Scatter has been positive but inconsistent over the past six months. Current business appears to be up double digits over last year's upfront and up slightly on a scatter-to-scatter basis year over year. Currently business is not as strong as it was entering the 2011 upfront, but it is good enough to drive a successful selling season for broadcast and cable networks.

Analysts' estimates are for mid-to-upper single percent gains in total upfront commitments. Consensus seems to be that most of the gain will come from pricing as advertisers are selling a similarly high percentage of available inventory as they did last year. I expect some pushback from ad buyers that may see the inconsistent recent scatter trends as an opportunity to lock in fewer commitments. The increased macro uncertainty over the past six weeks plays into this possibility.

Cable networks are expected to gain share from broadcast networks as measured by total upfront commitments. However, the share gain is projected to be less this year as cable network ratings gains have not been significant this TV season and many networks are actually down. Broadcast networks as a group have enjoyed a much lower rate of ratings erosion this season.

Another characteristic of this year's upfront is likely to be greater dispersion among individual networks and network owners. A recurring theme of my columns is that the national TV advertising recovery has entered a normal phase after several years of well above average growth off of 2009's cyclical low. In a normal market, ratings matter more.

As a result, look for ratings winners to be upfront winners. I would put CBS (CBS), Discovery Communications (DISCA), and Disney's (DIS) ESPN in the winners' camp due to consistently strong ratings. I also think Scripps Interactive (SNI) is in good shape as the company has seen a ratings recovery over the past few months across its larger networks.

The big ratings loser has been Viacom's (VIA) Nickelodeon. Time Warner (TWC) also has struggled somewhat across its family of networks. News Corporation's (NWSA) Fox Network faces a challenge with American Idol's weaker but still large ratings. News Corporation has other strong networks and is a winner on affiliate fees and retransmission revenues.

This column was previously published by SNL Kagan on
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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