3Q Media Earnings Not Affected by Economy

Analysts’ outlook for advertising market remains upbeat

Media companies starting
with Cablevision Systems this
week begin reporting their
earnings for the third quarter, and analysts
are expecting a better performance
than either the economy or stock market
would suggest.

While concerns about economic conditions
and debt levels have roiled Wall
Street, revenue for media companies
seems to have remained strong. This is
particularly true of advertising revenue,
which appears to have been robust in the
third quarter and looks to remain solid at
least in the fourth quarter.

Third-quarter results and the fourthquarter
outlook for the media “will likely
bear little resemblance to the [macroeconomic]
upheaval suggested in this summer’s
market activity,” said David Bank,
analyst at RBC Capital Markets in a recent
report. “We expect most media conglomerates
to report advertising growth
in-line with prior guidance.”

The biggest variable in the earnings
from company to company is over-thetop
digital content distribution revenue, as
some companies have made major deals
with Netflix, Hulu and Amazon while
others have not. Revenue from these deals
tends to be fairly high-margin, so it has a
big impact on quarterly profits.

Analysts really liked the recent deal
CBS and Time Warner made, selling
shows from The CW to Netflix. “Kudos,”
said David Joyce of Miller Tabak
+ Co. “A positive for CBS and Time
Warner as they add high-margin digital
syndication revenue here.”

On the downside, some companies, including
Viacom and Scripps Networks Interactive,
have already indicated that ratings
problems at some of their networks
will hurt advertising growth in the quarter.

Laura Martin, analyst at Needham &
Co., recently issued a report maintaining
her 46 cents a share earnings estimate for
CBS. “We believe CBS’ current ad spending
environment is stable and demand is
solid at both the local and national level,”
Martin said. “We believe the advertising
market continues to be robust at both the
local and national levels for CBS.” Martin
has a buy recommendation on CBS.

On the other hand, Martin lowered
her revenue estimate for News Corp. by
0.5% for the company’s fiscal year 2012,
which began in July. The revision reflects
“less aggressive growth assumptions in the
cable network division,” Martin said. But
for the third quarter, she expects the News
Corp. cable networks group to report 12%
growth in revenue to $2.09 billion.

According to Anthony DiClemente
of Barclays Capital, Scripps Networks
Interactive’s ad revenue growth is expected
to slow in the third quarter, but
management anticipates it improving
in the fourth quarter. “Still, we remain
guarded on ad growth upside, given ongoing
ratings softness at key networks,”
DiClemente said. On the upside over the
longer term, he noted that “affi liate rates
are well-positioned for increases as deals
come due in coming years.”

RBC’s Bank lowered his target price and
earnings estimate for Viacom, citing somewhat
softer-than-expected ratings (mostly
at the non-flagship networks) “[which] led
management to lower F4Q11 domestic ad
growth guidance recently [from double
digits to high singles].”

Industry wide, Bank found that scatter
ad prices in the fourth quarter are commanding
5-10% premiums over what
was a strong upfront. Partly because of
that strong upfront, “overall demand is
lower [though still stable],” he said.

Including the NBA lockout, which is
preventing the season from beginning on
time for Disney’s ESPN and Time Warner’s
TNT, and on top of a fairly normal
audience erosion pattern, “we believe
that the scarcity of inventory is allowing
a firm price floor for inventory to clear
at, but a lack of demand for that inventory
likely limits upside opportunity. We
are simply [making comparisons] to a
more buoyant market in the fall of 2010
[versus a more cautious 2011],” Bank
said. “We believe this environment could
lend itself to a modest uptick in cancellation
activity for 1Q12 as option deadlines
approach in November. The scatter
premium over upfronts could represent
a very modest cost for flexibility, even if
there is a decent likelihood that money
comes right back into scatter.”

Bank added that the outlook for 2012
national TV spending was still solid,
particularly for cable.

“Once again, we believe that ratings
will be the key driver for companies
to differentiate themselves, suggesting
News Corp.’s FX could be a real
standout in 2012,” he said. “However,
we also believe operators will be able
to drive outperformance through the
substitution of premium advertising for
direct response [i.e. Scripps Network’s
Travel Channel] or through the addition
of new advertisers, allowing emerging
networks to dramatically increase prices
over prior rate bases of early advertisers
[i.e. Discovery’s ID].”

As for Cablevision, Morgan Stanley’s
Benjamin Swinburne lowered his price
target on the cable operator to $20 a share
from $27 and cut his free cash flow estimate
for 2012 to $1.88 a share from $2.10
because of heightened competition. “We
believe, given Verizon’s aggressive offers in
the market, continued economic weakness
and recent increases in high-yield spreads,
the company may opt to slow its repurchase
levels down and move towards the
lower end of the range,” Swinburne said.

E-mail comments to
and follow him on Twitter: