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Media and Cable Earnings Solid but Not Perfect in a Tough Market


A lot of media and cable companies have reported earnings recently. The news is generally good but not good enough for a nervous Wall Street.

Last week and this week contain the bulk of the quarterly earnings reports from media, cable, and satellite companies. Since last Tuesday afternoon, we have heard from CBS (CBS), Comcast (CMCSA), Time Warner (TWC), Viacom (VIA), Scripps Interactive (SNI), Cablevision (CVC), Dish Network (DISH), Discovery Communications (DISCA), and Charter Communications (CHTR) (Disney (DIS) will report before this is published). Overall, I would classify the reported news as good and mostly in line with expectations. Guidance was consistent with prior management comments and analyst estimates.

However, the stocks largely reacted poorly. This was a function of two things. First, the market environment has turned hostile as worries are rising over global economic growth, particularly as Europe continues to struggle. The pace of the US recovery appears to have slackened as well. This has created what Wall Street now refers to as a "risk off" environment. Risk off means sell. Risk off is also characterized by sale of stocks perceived as sensitive to the economy. Media stocks are high the list.

Second, media stocks have done quite well this year. I have often explained that the short-term reaction to earnings is a function of the expectations bar. This quarter expectations were very high, partially because the stocks had moved up. The results and guidance were good but with the exception of Scripps Interactive, no company reported a clean "beat and raise" -- beating the earning estimates and reporting better earnings per share. Interestingly, the other stock that responded well to earnings initially was Viacom. Viacom had the least growth and weakest outlook of any company, but expectations were so low the shares rallied when the news was not worse. CBS, on the other hand, reported better than expected results, indicated that trends remain positive, saw analyst estimates and price targets increase, and now the stock sits about $2 below where it was trading before the report. The only problem with CBS is that the stock was at a 52-week high and everyone loves it.

I do not mean to repeat myself, but the price action in the stocks of Scripps Interactive, Viacom, and CBS is a good lesson on how Wall Street works on a day-to-day basis. Longer term, major business trends do matter. CBS is clearly on a roll and changing its business mix to higher margins and more predictability. Shareholders will continue to be rewarded. Viacom is still struggling with poor ratings performance, heavy required programming, and high marketing expenses to fix the problem. The big picture has not changed for either stock. Scripps Interactive might have hit an inflection point where the short-term data presages a major shift, in this case for the better as HGTV and Food Network seem to have emerged from what was probably a housing-recession induced period of weak ratings.

Broadly speaking, it appears that advertising growth picked up in the first quarter after a sharp and unexpected slowdown midway through the fourth quarter. Every company reported a pickup in growth sequentially. There are some signs that the strength abated late in the quarter but guidance for the second quarter is solid and certainly can be classified as predicting a healthy market.

In multichannel TV distribution, I see evidence supporting my thesis about a détente on promotions and discounting (see Is a Bullish Détente Brewing Among Multichannel TV Service Providers?) Average revenue per users (ARPU) was up across product categories, and even where annual price increases were delayed or will not take place, there was no disappointment with ARPU levels or trends. Subscriber counts were also mostly as expected. There was some disappointment that cable video subscriptions did not shift into positive territory. This may have been another issue of expectations as momentum of improvement in losses was strong the last few quarters. Cablevision did have positive video counts, but the cost was high as operating cash flows declined more than expected. The positive theme remains in high-speed data where cable continues to dominate and pricing is still firm. More and more analysts are noting that cable companies are shifting from being video-centric to broadband-centric.

I have only made a few moves in response to earnings. Ahead of results, I cut back slightly on CBS and Discovery Communications as the stock had reached intermediate price targets. Both stocks remain large holdings, however. I also bought put options on Cablevision when the stock did not open as weak as expected following what I thought was a weak report and a horrible conference call. Cablevision's heavy debt load is becoming a big problem with operating and free cash flow declining. Lack of management depth and arguably management expertise is another issue.

News Corporation (NWS) and AMC Networks (AMCX) report later this week. More on those and any additional observations next week.

A bunch of other smaller media companies also reported in the past week or two. Please feel free to leave a comment or send an email if there is something specific you are wondering about.

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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