Analyst: Political, Auto Ads Will Drive Strong Year-End Earnings for Entertainment Industry
TV advertising gains are driving improved financials, and a growth in cable advertising is predicted.
NEW YORK -- Continued TV advertising gains as a driver of mostly improved financials will be a key theme of fourth-quarter earnings reports from entertainment conglomerates during the coming weeks.
While earnings season will serve as a reminder that cable networks are generally the biggest profit contributors at sector biggies, film results are expected to be more of a mixed bag amid some flops and tough year-ago comparisons.
"The large-cap entertainment conglomerates have nicely outperformed the S&P 500 in 2011 year-to-date as the market anticipates strong year-end earnings largely driven by political and auto advertising," Evercore Media analyst Alan Gould said in a report. "We continue to believe that advertising is growing more quickly than GDP, driven by the ongoing rebound in auto advertising."
Credit Suisse analyst Spencer Wang also predicts sequential cable advertising growth improvement.
With all that in mind, latest advertising market color will certainly be a focus for Wall Street during management teams' earnings conference calls as will be growth guidance for the new year and any latest commentary on the growth of Netflix, now the second-largest media subscription business in the U.S.
Also expect updates on premium VOD plans with first film titles in the new premium release window to come out in the coming months. And after a recent report suggesting an increase in media/entertainment merger and acquisition activity, Wall Street may also sound out conglomerate CEOs to see whether their appetite for major deals has increased.
NBC Universal, now 51%-owned by cable giant Comcast, recently started the latest quarterly earnings parade of entertainment giants with a strong showing.
Up next is Time Warner, which is set to report its fourth-quarter financials on Wednesday morning, followed by News Corp. after the market close.
Time Warner is expected to record another good quarter of financial growth, but analysts say there could be some noise that may distract some investors from the solid figures. After a focus on explainable HBO subscriber losses on the previous earnings call, analysts will look for color on latest HBO trends plus any updates on CEO Jeff Bewkes' war of words with Netflix.
TW's TV networks unit will once again be the biggest driver of financial performance, but its results will be somewhat mixed.
Davenport & Co. analyst Michael Morris estimates 11% ad growth for TW's Turner cable networks, but he cautioned that "Turner ratings in the fourth quarter and to-date in 2011 have been relatively flat at TNT/TBS and remain down at CNN, limiting our confidence in ad outperformance."
Wang noted though that TBS' ratings swung from a year-over-year decline in October to gains in November and December, driven by Conan O'Brien's new talk show.
On the film side, Harry Potter and the Deathly Hallows Part 1 pulled in more than $900 million in global box office and Due Date did well, but Yogi Bear disappointed. DVD comparisons with the year-ago period also are tough as the latest quarter featured Inception and The Town compared with last year's Harry Potter and the Half-Blood Prince and The Hangover. However, TW in the year-ago period also was hurt by a $104 million writedown to the realizable value of Without a Trace, a program licensed by its Turner TV networks unit from its Warner Bros. studio.
Overall, RBC Capital Markets analyst David Bank eyes an operating profit gain of 16% for TW to $1.4 billion on a 3% revenue gain.
UBS analyst John Janedis expects TW to post fourth-quarter revenue of $7.3 billion, driven by a 9.3% network gain amid unchanged film revenue and a 6.7% decline in publishing. Earnings before various items of $1.6 billion should rise 6%, driven by gains in the networks and publishing units, partially offset by a 7.5% decline in the film division, he forecast.
News Corp. results should echo some of TW's trends as it also faces tough film comparisons due to Avatar along with theatrical flops, but it should once again report better cable network results despite some ratings challenges, including those at FX.
"Cable networks advertising continued to be incredibly robust," Bank said. "As for Fox broadcast, we don't think advertising was as severely impacted by the extremely soft ratings -- NFL ratings have been extremely strong and some returning shows such as Glee have been performing well, though new shows have been somewhat of a disappointment overall with no obvious hits."
On the film side, The Chronicles of Narnia: The Voyage of the Dawn Treader disappointed on the domestic front, and some analysts expect the company may have to take a writedown on Gulliver's Travels.
Bank sees operating profit rising 6.6% to $1.3 billion on a 1% revenue gain.
But analysts also will closely watch for any update on whether the conglomerate will sell or spin off social network MySpace.
On Thursday, Sony Corp. will report. Analysts who follow the company are generally overseas and focus more on its electronics business. But the theatrical runs of The Social Network and The Tourist, as well as the DVD performance of Karate Kid and Salt, helped its film performance for the quarter, although the year-ago period provides tough comparisons because of the theatrical success of 2012 and This Is It and the DVD run of Angels & Demons and Terminator Salvation. That is expected to lead to lower film results for the quarter.
Viacom is set to report its results later that day, and its cable networks unit is expected to post another quarter of improved advertising growth driven by the ratings success of such shows as Jersey Shore and Teen Mom. Analysts expect U.S. ad revenue growth of 9-10%. Of course, industry watchers also will keep an ear out for management comments on controversial MTV show Skins.
Viacom's film unit, meanwhile, should see lower profitability due to tough year-over-year comparisons. "The drivers in the quarter included an estimated $95 million one-time payment to Paramount from Disney related to the restructured Marvel distribution deal, a relatively strong theatrical slate offset by tough year-over-year home video comparisons and higher P&A costs," Credit Suisse's Wang said.
The theatrical titles included Jackass 3D, Paranormal Activity 2 and True Grit, compared with last year's Up in the Air, Lovely Bones and carryover from Paranormal Activity. The latest quarter's DVD titles included Shrek Forever After, The Last Airbender, Dinner for Schmucks, Middle Men and How to Train Your Dragon, but they fell short of last year's hits Transformers 2, Star Trek and G.I. Joe.
Overall, Bank predicts a 1% operating profit decline to $1.08 billion on a 4.4% revenue gain at Viacom.
Disney reports its latest financials on Feb. 8. "ESPN likely had another great quarter with ratings improving sequentially and NFL viewership stronger than ever," Bank said. "The studio's theatrical releases were generally softer than expected as Tron: Legacy underperformed expectations with approximately $150 million in domestic box-office receipts and Tangled underperformed relative to its production budget of an estimated $260 million. Fortunately, we do not think the year-over-year theatrical comparisons were all that difficult."
Wang expects studio profitability to rise 22%. At ABC, however, scatter pricing strength should be offset by weaker ratings, he said.
Taken together, Bank estimates Disney will record a 16% operating profit gain to $1.64 billion on an 8% revenue improvement. Wang sees earnings of $1.9 billion, up 17%.
CBS Corp., the best-performing media giant of 2010, will wrap up the quarterly earnings season on Feb. 16.
Morgan Stanley analyst Ben Swinburne expects higher advertising revenue and benefits of prior-yearc cost initiatives to boost profitability. TV network ad revenue will rise in the high single-digit percentage range, local TV station and radio ad revenue will also be strong, but the company's early stage film business will once again be a slight drag, analysts predict.
Miller Tabak analyst David Joyce estimates CBS may have lost $13 million in the latest quarter and $105 million for all of 2010.
Overall, Joyce forecasts quarterly revenue of nearly $4 billion, up 14%, and adjusted operating profit of $827 million, up 7%.
Entering earnings season, Wang recommends shares of Disney and Time Warner.
"For Disney, we expect results to demonstrate continued evidence of the cyclical earnings recovery," he said. "For TW, we expect management to provide 2011 guidance and see upside to consensus estimates. Another catalyst may be increased returns of capital."