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Is a Wholesale Trend Toward the Bears Under Way for Media Companies?


Although a few companies have met or exceeded expectations, investors are likely to remain on edge with cable and satellite stocks.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

Several important media companies have reported earnings since yesterday's close, kicking off about a dozen reports from the media world this week and next. After the lousy news from Time Warner Cable (TWC) and Cablevision (CVC) last week, investors were anxious to learn if a wholesale trend change toward the bears was under way. So far, that is not the case as Discovery Communications (DISCK), Comcast (CMCSK), and Time Warner Inc. (TWX) affirmed healthy industry trends. Discovery and Comcast shares are responding well to earnings. Time Warner is weak, but that is due to issues unique to the company (weak ratings at key cable networks). Management commentary on industry trends is constructive.

Comcast met expectations pretty much across the board. This comes as a great relief following back-to-back misses and poor guidance from Time Warner Cable and Cablevision. The only notable weakness in the report was phone subscriber additions. This was a problem area for Time Warner Cable, but Comcast management noted that its promotional push was back to school and stressed video and high-speed data. Both those sub numbers looked good.

While Comcast's results come as some relief, investors are likely to remain on edge with cable and satellite stocks. Comcast is a long-term laggard on cable operations. As a result it has low-hanging fruit that is allowing it to sustain mid single-digit revenue and earnings before interest, taxes, depreciation, and amortization growth and positive subscriber momentum, even as the industry is mature and fully penetrated, feeling pressure from lack of household formation (household counts may actually be reversing), and cord-cutting fears rise. DirecTV (DTV) reports tomorrow, which will help to round out video trends in the near term. Too soon to call the coast is clear, but I think Comcast remains the domestic cable company of choice for investors.

Discovery reported a strong quarter boosted above Street expectations by the recent deal with Netflix (NFLX). Taking away Netflix, results were pretty much right in line with Street estimates and guidance. Guidance for 2011 was upped to reflect the Netflix deal. Critically, domestic advertising trends exceeded guidance, coming in up 11%. Furthermore, management guided to mid-teens growth for the fourth quarter and indicated no cancellations so far of first-quarter 2012 upfront commitments. Analysts were still skeptical of advertising trends, which will remain the primary issue for the big entertainment companies that own the leading cable and broadcast TV networks. National TV networks are the primary business of most entertainment conglomerates these days.

Time Warner was generally constructive on advertising trends even though it reported upper single-digit ad growth and guided for the same in the fourth quarter. Time Warner networks are really struggling with ratings, which is hurting ad pricing, particularly for scatter or spot buys. Discovery management indicated that scatter pricing was up 5 to 20% depending on the ratings of its networks. Time Warner was talking scatter being up just low single digits. I would not read too much on media fundamentals into Time Warner dropping almost 3% today. The company is clearly lagging its peers in national TV. However, the drop in Time Warner shares shows that media investors remain generally scared and skeptical, and that presents challenges for the rest of the group.

We will be learning a lot more in the next 24 hours. News Corp. (NWSA) reports after the close today. Scripps Networks Interactive (SNI) and DirecTV report before the open tomorrow, and CBS Corp. (CBS) reports after the close tomorrow.

I am long Discovery, CBS, DirecTV, Comcast, and Cablevision, but overall I have less exposure to traditional media than I did earlier this year. You can color me bullish though. Worried for sure, but bullish.

Disclosure: CVC, CMCSK, DISCK, CBS, and DTV are net long positions in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the funds. CBS and DISCK are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts.

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Positions in CVC, CMCSK, DISCK, CBS, and DTV
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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