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What to Look for as Media Earnings Kick Into High Gear This Week


Macro views on advertising, affiliate fees, and cord cutting still matter, but at this stage of the cycle, individual companies can win or lose more easily.

Media companies usually report toward the tail end of each quarterly earnings season. This week about 25% of the S&P 500 (^GSPC) report earnings, and by week's end, most of the S&P 500 will have reported. For media companies, CBS (CBS) and Regal Entertainment (RGC) kick off the week after the close on Tuesday. Wednesday morning brings Comcast (CMCSA), HSN Inc. (HSNI), and Time Warner (TWC) before the open and Dreamworks Animation (DWA) after the close. Thursday morning offers reports from Viacom (VIA), Cablevision (CVC), Scripps Interactive (SNI), and Lamar (LAMR). National CineMedia (NCMI) checks in after the close on Thursday. Other companies of interest to media investors reporting this week include Sirius XM Satellite Radio (SIRI), which reported this morning and Barry Diller's Interactive Corporation (IACI) on Wednesday morning. Tower companies SBA Communications (SBAC) and American Tower (AMT) report on Tuesday and Thursday morning, respectively.

One of my overriding investment themes for 2012 is that the economic and media cycles have moved to the point where individual company fundamentals have replaced macro concerns as the drivers of stocks. Coming off the cyclical low in 2009, there was a rising-tide-lifts-all-boats mentality among media investors, particularly for advertising-supported stocks. Macro concerns extended to cable as well, due to the rise of Netflix (NFLX) and worries about cord cutting and lack of household formation.

Late last year saw the national ad cycle return to normal after several years of above-average growth. A stumble in the fourth quarter for the scatter market signified to investors that it was time to focus on ratings winners and companies with above-average growth in affiliate and retransmission fees.

A series of missteps by Netflix, solid earnings reports from cable companies, and a sort of détente on pricing completion among cable, satellite, and telco providers created a similar shift from big-picture concerns to individual-company outlooks.

Heading into the first of two weeks of earnings reports from media companies, let's consider what investors should be looking for.

The national TV ad market slowed markedly and unexpectedly in the second half of the fourth quarter. Most companies indicated a 2012 pickup was underway when they reported their December quarter earnings in late January and early February. All indications are that the national TV ad market is healthy into the spring. As a result, most companies should report sequentially higher advertising growth in the March quarter.

However, ad growth is probably going to be the most significant differentiator among media companies this quarter. The normalization of the ad recovery means that ad dollars will flow toward networks with good ratings. CBS and Discovery Communications (DISCA) are clear winners in this regard. Scripps Networks could also be a winner as its ratings are mostly on the upswing after a tough 2011. AMC Networks (AMCX) could also be a winner. Its schedule of original programming hours is limited, but Walking Dead and Mad Men drew strong viewership. A loser could be Time Warner where TNT, TBS, and CNN have continued to struggle with ratings. Viacom is sure to struggle given massive ratings declines at Nickelodeon. News Corporation (NWSA), a perennial winner, faces the first quarter where American Idol showed a ratings setback.

Cable results are off to a good start. Time Warner Cable is an early reporter and financial and subscriber metrics at least matched Wall Street estimates. Revenue and EBITDA growth is modest, mid-single digit, but free-cash-flow growth and return of capital to shareholders remain strong. AT&T (T) and Verizon (VZ) have also reported and their subscriber metrics suggest a benign environment for cable companies. In particular, broadband market share continues to look very favorable for cable with minimal price discounting. I expect these patterns to repeat at Comcast with the outside possibility of a return to positive video subscriber growth. Cablevision is suffering from a fully penetrated and intensely competitive market and what most outsiders assume is management turmoil. Comcast remains a very good investment idea benefiting from economies of scale, tightened cost and operating management, and effective branding efforts.

One area to be wary of for Comcast, Cablevision, and multichannel TV providers to report later is programming expense. Rising affiliate fees and new and increasing retransmission fees are going to pressure video video margins with no relief in sight.

For CBS, focus will be on advertising growth and operating margins. Expect good news.

Regal will benefit from the excellent first-quarter box office, but this is already widely known as investors await the summer movies.

Comcast needs to continue to outperform its cable peers.

HSN needs more growth from TV shopping and to sustain momentum at its e-commerce units.

Time Warner lacks excitement despite aggressive share buybacks. Improved ratings and ad growth are key.

Dreamworks needs hit movies, better home-video conversion, and a clear plan for distribution of its films.

Viacom needs to show it can grow while Nickelodeon struggles and articulate a clear plan for turning around the kids network.

Cablevision needs to convince investors its new management team is credible and has a plan.

Scripps has to show ratings improvements are translating to advertising gains without too much margin pressure from programming investment and marketing its channels.

National CineMedia could use advertising growth ahead of national TV advertising and signs that it can grow ads independent of the health of the broader ad market.

Next week we can see how the first wave of reporters did and look ahead to a fresh batch of reports. I'll do you a favor and listen to all the conference calls for you!

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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