Analysts mixed about conglomerates' stocks

What to look for in upcoming earnings reports

Thanks to a rebound in advertising, media and entertainment financials look much healthier compared with a year ago as first-quarter earnings season for the publicly traded giants kicks into high gear.

Conversely, though, a run-up in conglomerate stocks that began about a year ago soon might come to a halt amid higher valuations and investor doubt that there is much more immediate upside.

The economic and ad upticks still aren't running full-steam ahead, but the ad upswing during recent months has been stronger than expected, especially in local markets. It will make for heartier ad figures from sector giants, but it raises questions about whether momentum has continued into the second quarter.

Judging from recent CEO comments, the answer is yes.

Overall, the opening quarter of 2010 continued the trend toward the conglomerates' return to revenue growth. And last year's recession laggards -- think News Corp. and CBS Corp. -- likely will bounce back and post better revenue growth than others for the latest quarter.

None of the sector giants saw revenue growth for at least a year during the recession, relying instead on cost cuts to boost bottom lines until most returned to slight growth during the final quarter of 2009. Straggler NBC Universal finally boosted revenue during the first quarter, thanks in large part to the Vancouver Olympics; Viacom still recorded a slight revenue decline.

Wall Street now will look closely at whether and how much the trims of the past couple of years and underlying ad momentum can lead to further upside surprises. With one-third of the year already over, many analysts will look at whether financials can grow fast enough next year to warrant higher stock prices.
 

The debate about whether big media stocks must take a breather has bubbled up lately in analyst reports. Some on the Street are less optimistic than others.

"While we maintain a bullish view on ad trends themselves, we do believe that investor expectations for advertising growth are more adequately reflected in stock prices at this juncture as media now trades at a premium to the stock market on basic valuation multiples," Barclays Capital analyst Anthony DiClemente said recently.

Added Miller Tabak analyst David Joyce, "We are not quite ready to downgrade entertainment conglomerates that are approaching our price targets yet, as margin upside from a year of cost-cutting could be the reason these companies might beat estimates, but we are cautious as the ad revenue rebound is not in a strong snap-back mode."

Most agree that better-than-expected first-quarter results and possible increases to company guidance could temporarily boost industry stocks.

A look at what to look for as key sector leaders report latest figures:

Viacom

Sumner Redstone's company kicked off the earnings parade for separately traded entertainment firms Thursday after General Electric recently posted results for its NBC Universal arm. Viacom has received a lot of love during recent months from analysts in the form of upgrades and price-target increases.

The company posted a 4% revenue decline driven by weaker DVD sales and a smaller film slate, but its profit rose thanks to cost reductions that particularly helped the film unit narrow its loss. Importantly, Viacom's U.S. ad revenue turned a corner to eke out a 1% year-over-year gain after several quarters of declines.

Management touted ongoing improvements during the current second quarter, highlighting increased willingness by marketers to spend to promote new products.



CBS Corp.

Redstone's other company is the most ad-exposed media giant, but its stock has performed solidly and hit 52-week highs of late.

DiClemente last week raised his first-quarter estimates "to reflect a rapidly improving local ad environment."

Joyce did the same before him, citing strong pacings for local TV station groups in the high-teen percentage range.

"CBS owns 30 broadcast TV stations but is not expected to have quite that high level of growth, since the stations are in the eight largest (and 15 of the top 20) markets in the U.S., which did not fall as much last year and did not have as much exposure to the closure of local auto dealers," he said.

Besides TV stations, analysts said the driving forces will be CBS network revenue -- thanks to record Super Bowl viewership -- and the long-awaited return of the long-suffering radio unit to growth.

Joyce estimated total CBS revenue of $3.34 billion, up 5.8%, operating income before depreciation and amortization of $382 million and a profit of $42 million. DiClemente projects revenue of $3.48 billion, up 10%, and focuses on adjusted OIBDA of nearly $338 million, up 35%.

Plus, on the CBS earnings call, analysts are likely to ask generally bullish president and CEO Leslie Moonves about his expectations for the fast-approaching upfront ad market.

Time Warner


The key focus of the company's conference call likely will be whether its sharpened focus on content businesses after recent divestitures will drive financial growth comparable to its peers, given that the businesses already have performed so well.

DiClemente last week modestly raised his cable-networks ad assumptions for the quarter but lowered film estimates.

After challenges during the fourth quarter, cable-unit ad revenue will be up for the first quarter, "despite continued top comparisons at CNN against the Obama inauguration last year," TW CFO John Martin has said.

Credit Suisse analyst Spencer Wang this month highlighted that ratings for entertainment networks TNT and TBS improved in March, with TNT up 10% year-over-year (compared with a 2% gain in February) and TBS' decline moderating to 6.5% (versus a 8.7% drop in February). "Turner is on track to achieve our 2% year-over-year U.S. ad-growth forecast in the first quarter versus a 4% decline in the fourth quarter," he said.

But DiClemente has cautioned that TW's TV arm has made big-ticket program bets recently, from Conan O'Brien to the NCAA men's basketball tournament, which could cut into earnings if ratings don't play out as planned.

Other themes on which Wall Street might focus during the earnings call include the state of bidding for MGM and challenges for the film unit, whose first-quarter releases included the successful "Valentine's Day" and "Cop Out."

DiClemente eyes quarterly revenue growth of 1.8% for TW to $6.1 billion, a 16% profit decline to $554 million and OIBDA of $1.4 billion, up 10%.

News Corp.

Many analysts have boosted estimates for the company's first calendar quarter, its fiscal third quarter, because of the strong ad market and upside from "Avatar." (Other film releases during the quarter included "Diary of a Wimpy Kid.") Wang also has cited the upside for cable networks.

Given higher exposure than most peers, Rupert Murdoch's company is seen as having the most upside to earnings expectations from the rebound in local media markets.

Analysts expect the positive factors to lead management to raise full-fiscal-year operating-income guidance from the current low-20% range.

Several would like to hear a promise from the chairman and CEO and his team to return money to shareholders, most likely in the form of share buybacks.
DiClemente expects nearly 17% quarterly revenue growth to $8.6 billion for News Corp.; a $616 million profit, compared with $2.7 billion last year thanks to two big one-time benefits; and adjusted operating income of $1.1 billion, up 37%.

Disney

The company's fiscal second-quarter revenue will benefit from better TV ad trends, the acquisition of Marvel and the boxoffice success of "Alice in Wonderland," which will offset ongoing sluggishness in the theme parks unit. Higher programming expenses, particularly because of sports rights, will be a drag on the bottom line.

Joyce projects a 3% quarterly revenue gain to $8.3 billion and a profit uptick to $903 million, compared with $613 million -- or $812 million on a normalized basis -- during the year-ago period.

Sony


For the final quarter of last year, Sony posted its first profit in five quarters amid film successes, cost reductions and an improving economy. CFO Nobuyuki Oneda said that could lead to upside to the projected $330 million loss for the company's fiscal year that ended last month.

"The economy has bottomed out; it's still possible we could break even for the full year," he said.

When Sony reports its latest quarterly and fiscal-year figures, investors will find out how much upside there really was.

Moviewise, it was a relatively quiet quarter without major outperformers or flops. The respectable "Dear John," "The Bounty Hunter" and "Legion" were the boxoffice releases, and "Zombieland" did good business on DVD.

Meanwhile, the video game business might surprise. Market researcher NPD Group recently reported that Sony's PlayStation 3 sold 43% more units in March than during the year-ago period. The console got a boost from sales of 1.1 million units of "God of War III," which it had exclusively.
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