Amid Merger Mania, Second Quarter Earnings ‘Irrelevant,’ Analyst Says - Broadcasting & Cable

Amid Merger Mania, Second Quarter Earnings ‘Irrelevant,’ Analyst Says

Weaker profits could boost odds of takeovers
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With consolidation becoming the dominant theme in the media industry, Wall Street analysts are wondering if the second-quarter earnings, which will be released over the next few weeks, matter.

Todd Juenger of Sanford C. Bernstein & Co. said that Rupert Murdoch’s bid for Time Warner, confirmed last week, made this quarter’s earnings “essentially irrelevant.”

In fact, Juenger, in Monday morning notes says “Time Warner is in the perverse situation where the worse their quarterly results, the better the stock will react (because it increases likelihood of a deal). To a lesser degree, the same could be true for any of the companies considered 'in play' (Scripps Networks, AMC Networks, Discovery Communications), or, really, the entire sector. Weakness across the board would strengthen the urgency for companies to combine and become stronger.”

As far as the industry’s fundamentals are concerned, Juenger says business is good.

“We continue to believe underlying international drivers/results will be strong, highlighting the growing disparity between international (‘good’) and domestic (‘less good’). This growing gap favors consolidation for the sake of globalization and to bolster international presence for those companies which lack it,” he says.

The dark cloud hovering over the TV business has been the potential for weaker ad spending, particularly signaled by lower upfront spending.

Juenger is sanguine about the ad revenue outlook. “In addition to an inevitable deceleration in advertising growth after several years of fast growth coming off the recessionary bottom, we believe the relatively weak upfront volume was mostly a factor of advertisers holding back more of their spend for scatter, buying themselves more flexibility with less of a fear they will get burned by high scatter pricing,” he said. “We believe advertising revenue will eventually show up, as advertisers will continue to invest in brand advertising as they seek volume and share growth of the recovering consumer. The increased proportion of scatter may cause ratings performance to be more directly correlated with ad revenue than usual.”

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