While cable units continue to be a bright spot in big media and are helping
to drive a better-looking earnings season, expectations for the sector's
pure-play stocks may start dimming.
Discovery Communications and Scripps, the two pure-play cable stocks, both
did well on the advertising front. Even so, some Wall Street analysts say
investors' attention might be better focused on stocks that don't have such
high expectations priced in. Morgan Stanley and Bernstein Research analysts
reduced earnings per share (EPS) estimates for Discovery last week.
Morgan Stanley media analyst Ben Swinburne cited two factors: higher
marketing expenses ahead of the launch of kids network The Hub; and the news
that Discovery will support 100% of the advance costs of launching OWN, the new
network from Oprah Winfrey, even though it acquired 50% of the assets. "We
prefer more cyclically exposed stocks in media, or where valuation levels are
more reasonable," wrote Swinburne in a note last week.
Still, the factual TV giant beat analysts' top-line expectations and
produced a 2% uptick in ad revenue to $287 million for the fourth quarter. "The
[first quarter 2010] domestic advertising pacing trends, which are increasing
approximately 5% year on year [at Discovery], give us increased confidence in
our advertising expectations for the year," Swinburne added.
Bernstein Research's Michael Nathanson also likes Discovery, but in a Feb.
11 note titled "Discovery & Scripps: Is the Pure Play Cable Trade Over for
Now?" Nathanson reduced EPS estimates for both companies. Ad revenue for the
full year at Scripps TV channels was about flat with the previous year at $1
billion, and rose 6.8% in the final quarter of the year to $281 million.
In the face of programming-related writedowns, restructuring charges (mostly
severance pay) and a mixed bag for fourth-quarter ad revenue, good news at
cable units helped temper the picture for some conglomerates reporting in
recent weeks. The Walt Disney Co. said during its latest quarter, operating
income at its cable networks rose by 11% to $724 million, on higher
subscription revenue at ESPN and Disney Channel. But at Viacom, Paramount
provided the boost, while fourth-quarter ad revenue for its programming
networks, which include MTV and BET, was off
by 4% versus the year-ago period.