Wall Street Less Interested in the Past - Broadcasting & Cable

Wall Street Less Interested in the Past

Analysts want 2010 visibility...and won't be impressed by growth over a dismal 2009
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News Corp., Time Warner and Comcast kick off large-cap earnings season this week, and company executives will face a forward-looking Wall Street as Big Media offers the first glimpse of how 2010 is shaping up.

Analysts know a growth story won't be hard to pull off given comparisons with the disastrous fourth quarter of 2008, and as a result some caution against wishful thinking on any ad rebound. "Cautious optimism" is expected to be the buzz-phrase on the calls.

"We believe management teams will need to provide specific data supporting the sustainability of stronger trends," wrote UBS entertainment analyst Michael Morris, in a note titled "Ad Bull Taking a Breather?" published on Jan. 25. "Poor visibility into 2010 will likely limit conviction on positive outlooks."

Morris is concerned about the bullishness surrounding companies with local advertising exposures given the remaining lack of visibility. The analyst suggests that placing a long-term bet on upticks in local advertising "feels more like a trade at this point than an investment."

The national versus local story will be closely watched by analysts eager to see where those ad dollars land, if ad spending does gain strength. David Bank, managing director of global media and Internet research at RBC Capital Markets, thinks the Supreme Court ruling that paves the way for corporations to spend more freely on political issues could goose the News Corp. stations.

As to the quarterly gyrations of the TV ad market, Bank told B&C: "There is modest deceleration in scatter from the fourth quarter to the first. The market is still reasonably tight." He says he'll be looking to hear about advertisers' cancellation rates in coming quarters to help decide the strength of the comeback. "Ratings matter," he added, "Not just CPMs." He thinks Viacom will have lots to say about MTV's comeback on the strength of hit show Jersey Shore, but wonders whether MTV can benefit from that halo across the board.

Bernstein Research analyst Michael Nathanson says, "We think local will accelerate and improve in the first quarter. National will remain strong [in fourth quarter], but sequentially won't be that much better than third quarter." Nathanson sees both auto and retail categories up on last year's period, but adds that local growth has been driven by easy comparisons. IPG unit Magna has local TV ad spending at $15 billion, down 25% in 2009.

Advertising is closely watched by the Street because companies that are more dependent on ad revenue have seen the biggest improvements in their stock prices.

According to data provided by UBS, CBS Corp. (with 67% of revenue derived from advertising) has seen its stock price rise 90% since May 28, 2009; Scripps Networks Interactive, with 63% of revenue derived from advertising, has seen its stock price jump by 61%. On the other end of the scale, Time Warner's stock price over the same period is up just 15%; only 20% of its revenue comes from advertising.

News Corp. begins the week's presentations on Feb. 2, and is followed by Time Warner on Feb. 3 and Comcast the same day. The following week, Disney announces on Feb. 9, with Discovery and Scripps landing on Feb. 10, and Viacom on Feb. 11. CBS reports on Feb. 18.

But advertising isn't the only picture; ratings matter, too, as does the retransmission consent battle for fees. RBC's Bank is also looking to unravel the mystery of retrans deals with questions about how much Fox got, where the increased fees are going to come from and how much non-owned affiliates will pay networks. "But I'd argue that what happened with Disney/ABC and Hearst and Sinclair and LIN, to get reverse compensation; that's key for me," Bank says.

Beyond the earnings calls, Nathanson is keeping a close eye on the C3, or commercial ratings performance of broadcast versus cable networks. Nathanson observes that in fourth quarter 2009, broadcast lost just 1% of viewers versus a 3% dip for cable. He believes that broadcast may have benefited from a strong improvement in sports programming from the NFL and MLB playoffs, at a time when cable has had a harder road in light of the news networks' lackluster performance versus the boffo 2008 political season. He's wondering if cable's viewing gains have peaked. "Cable networks have posted declines in live primetime viewing that were as steep as broadcast, for the first time ever," he wrote in a note issued on Jan. 21.

Barclays Capital media analyst Anthony DiClemente raised ad estimates on Jan. 28. DiClemente thinks total U.S. advertising will rise 3.5% to $167.6 billion. It had previously been flat. DiClemente believes national TV will be up 7.8% this year, national cable networks up 6% and local TV up 5%. He told B&C, "In general, a lot of media companies have been beaten down in 2009; we'll get a cyclical bounce."


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