Cord-Cutting Concerns Dominate Q4 Earnings

Disney/ESPN will set tone on affiliate growth, revenue
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In many ways, the fourth quarter was a good one for media companies. Ad sales improved after six quarters of weakness. For many networks, ratings appear to have stabilized. And analysts have made upward revisions in most of their earnings estimates.

“Some things feel pretty good,” says Marcy Ryvicker of Wells Fargo, who adds that the potential for industry consolidation could help the value of media stocks.

But Ryvicker and other analysts say none of that might matter on Wall Street. “We believe that investors’ singular focus will continue to be on affiliate fee growth and changes in domestic pay-TV subscribers,” says Michael Nathanson of MoffettNathanson Research. “So despite a clearly stronger ad market, changes in TV measurement, the easing of foreign exchange headwinds and the potential drumbeat of M&A, concerns about the rate of cord-cutting will likely still dominate.”

As media companies report earnings for that fourth quarter of calendar year 2015, starting with Comcast this week, the stock market has been bearish. And so far this year, the Standard & Poor’s Index has been down 7% and the diversified media stocks have been 3% lower despite improving fundamentals.

Here are three things to listen for from top industry execs during their earnings calls.

Whose Cord Is It Anyway?

Ryvicker said she’s looking at media companies to average 6% affiliate fee growth in the quarter. She looks at the slowdown in domestic subscriber growth reported by Netflix last month “as a nice positive, if just for sentiment alone.”

But when it comes to affiliate revenue and cord-cutting, what will really matter is what Disney has to say, especially when it comes to ESPN. Disney CEO Bob Iger’s disclosure that affiliate fee growth might slow because of a drop in subscribers during the company’s second-quarter earnings call sent the media sector into a tailspin that cost shareholders billions.

Ryvicker says when it comes to subscriber revenue, Disney’s reporting should be uncharacteristically clear. She notes the company has no new networks, no new carriage agreements and no deferred revenue to affect comparability. She’s expecting to see a 4% increase in affiliate fees and says her colleagues on the street are at anywhere between 3% and 6%.

There’s a broad range of concerns over how much to worry about ESPN. Rich Greenfield of BTIG Research, who generally sees traditional media crumbling, commissioned a poll that showed most subscribers are interested in dropping ESPN to save a few bucks.

But many still call Disney a buy. Nathanson labels concern about ESPN’s competitiveness in an over-the-top environment “hyperbolic drivel.” And Alexia Quadrani of J.P. Morgan says, “We continue to believe in the health of the Media Networks division and Cable in particular despite some investor concern around sub declines, viewership shifts and programming costs. We view Disney’s cable networks and ESPN in particular as great assets that continue to draw significant advertiser demand and command high affiliate rates with must-watch sports content.”

Ad Dollars Pile Up

Nathanson expects national TV advertising to be up in the mid-single digits after six quarters of tepid growth. The scatter market has been strong, which disproportionately helps cable, and sells a larger portion of its inventory in the scatter market.

He expects AMC Networks and Disney to rack up gains in double-digit territory in cable and sees Fox pulling out of its long tailspin to show a 3% increase in broadcast ad revenues. Bringing up the rear is Viacom, which should show a 5.5% decline in ad revenues.

But again, gains in ad revenues probably won’t turn investors’ heads.

“Is ‘strong’ advertising enough to move these stocks?” asks Ryvicker. “It depends on what you mean by strong. Viacom being ‘less negative’ than our and [Wall] Street estimates doesn’t really get us excited [we are at 6%].”

Revising Earnings Up

Both Nathanson and Ryvicker say they’ve pushed up earnings estimates for some of the companies they cover.

Nathanson says he’s raised earnings-per-share estimates for Time Warner, Disney, Scripps Networks and Discovery. He’s a bit lower for CBS and 21st Century Fox and unchanged on AMC Networks.

Ryvicker’s earnings estimates are up for Disney and Time Warner. But she’s lowered the outlook on CBS and Viacom. She’s concerned about some of CBS’ expenses (NFL, OTT), but on the other hand, “Fox could be interesting if expenses come in lighter than expected.”

WALL STREET’S VIEW

The consensus on earnings per share for major media companies that will be reporting over the next few weeks.

AMC Networks....................................$1.16
CBS .................................................... 0.94
Discovery .............................................0.42
Scripps Networks .................................1.01
Time Warner ....................................... 0.99
21st Century Fox ................................ 0.45
Viacom ............................................... 1.19
Walt Disney Co. ..................................1.44

Source: MoffettNathanson analysis of Thomson data.

In many ways, the fourth quarter was a good one for media companies. Ad sales improved after six quarters of weakness. For many networks, ratings appear to have stabilized. And analysts have made upward revisions in most of their earnings estimates.

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