Film doubts may cloud earnings

Disney, TW units could be soft; gains expected in digital sector

Wall Street expects few major upside or downside surprises when most of the big U.S. media and entertainment conglomerates report their latest quarterly earnings during the next couple of weeks, but somewhat weak film results are likely to be one key trend across the board.

"We don't expect many surprises," Banc of America Securities analyst Jonathan Jacoby said in a report previewing the latest wave of earnings news. "Similar to prior quarters, we expect lackluster trends in many of the traditional businesses to continue, offset by stronger growth in digital."

In the run-up to earnings season, Jacoby made the biggest changes to his financial models at News Corp. and the Walt Disney Co.

For News Corp., he slightly lowered his estimates because of "lower-than-projected film results," while he boosted his Disney projections "due to a stronger broadcast environment but also due to better trends at the parks and consumer products segments."

Most on Wall Street expect analysts and investors during earnings calls with management teams to concentrate on the same issues that have been their focus for a while: Capital allocation priorities — from stock buybacks and dividends to possible acquisitions — and the continued push into the digital media space should therefore top the list of popular questions.

Observers also hope for updates on this year's upfront sales and general advertising market trends.

News Corp.'s latest quarterly earnings are for its fiscal fourth quarter. That means Wall Street will look for the conglomerate's growth guidance for its newest fiscal year and find out how the company's recent rejigging of its asset portfolio could affect its outlook.

Observers said they are hoping for updates on the sales process for such assets as nine Fox TV stations, News Corp.'s outdoor unit and Gemstar-TV Guide International. They also will look for comments on Dow Jones & Co., which chairman and CEO Rupert Murdoch has been trying to get his hands on, as well as recent market reports that News Corp. could restructure its new-media assets, perhaps by taking a stake in Yahoo Inc. in return for Murdoch's MySpace.

Investors certainly will look for data points and color on how MySpace is doing. "Facebook is emerging as a serious competitor to MySpace," Bear Stearns analyst Spencer Wang said in a recent report, echoing the sentiment of industry watchers. "We think MySpace will need to respond as engagement metrics (minutes per unique) have flattened. This could lead to higher costs over the intermediate term."

Jacoby estimates News Corp. will post a "solid" 17% gain in operating income to $1.2 billion driven by easy newspaper comparisons, solid cable network results and continued improvements in profitability at satellite TV platform Sky Italia "as well as better-than-expected results at TV, partially offset by weak film results." Fiscal fourth-quarter revenue should hit $6.9 billion, up 1%, he projects.

That is short of Jacoby's 5% revenue growth estimate for Time Warner Inc. to $10.9 billion. He also eyes operating income before depreciation and amortization to rise 15% to $2.9 billion.

One soft spot will be the world's largest media company's film unit, which should have "a soft OIBDA quarter" because of print and marketing costs for "Harry Potter and the Order of the Phoenix" movie, which hit theaters after the end of the quarter, and tough TV syndication comps.

Meanwhile, Disney should report revenue of $8.8 billion, up 4%, and operating income of $2.2 billion, up 9%, for its latest quarter, according to Goldman Sachs analyst Anthony Noto.

He sees solid upside for Disney shares, arguing in a recent report that "Disney trades at a 9% price-earnings discount on 2008 estimates to its large-cap media peers despite faster growth."

Jacoby expects strength in "all segments, except for film, which has a tough home video comparison."

CBS Corp., which will issue its latest quarterly financials today, should report "an in-line quarter with weak performance at most segments (radio, CBS network and TV stations) offset by strong (pro-forma) growth at the outdoor segment," he said.

He projects a 2% revenue decline to $3.4 billion, including a 3% TV decrease and a 9% radio drop.

Viacom Inc. will bring in second-quarter revenue of $3.1 billion, a 9% increase, Noto said.
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