Film results to control third quarter

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NEW YORK -- With many entertainment giants set to report their latest quarterly financials in the coming days and weeks, sector investors will look for any signs of potential catalysts that could further drive media stocks at a time when many big issues have been hitting new highs.

Observers said they will particularly look for comments on how the advertising market is trending ahead of the start of a new year and how companies' digital-growth strategies are playing out.

Overall, Wall Street has so far seen healthy earnings momentum for the third quarter, with several upside surprises.

Media and entertainment analysts have been fairly quiet in the run-up to reporting season this time around, with only a few announcing modifications to financial projections for the quarter for select companies in recent weeks. One key theme mentioned by many is that the latest set of results will include film results that will often be lower because of difficult comparisons with the year-ago period.

With General Electric having reported quarterly results for NBC Universal and entertainment and consumer electronics giant Sony Corp. having provided its latest figures, Time Warner Inc. on Wednesday is the first big U.S.-based, entertainment-focused company to tell investors how it did during the third quarter.

Investors, for their part, have been unusually bullish on the world's largest media firm as of late, recently driving its shares beyond the $20 mark and to their highest level in four years.

Merrill Lynch analyst Jessica Reif Cohen was one of the Wall Street observers who recently updated her third-quarter estimates for the recent acquisition of cable operator Adelphia Communications and other factors.

She slightly lowered her profit projection for TW "due to higher interest expense and depreciation from the consolidation of Adelphia." But excluding Adelphia, she boosted her third-quarter estimate for operating-cash-flow growth from 4% to 5%.

"Better-than-expected performance from AOL should be somewhat offset by weaker results at Filmed Entertainment and Publishing," she wrote, citing "extremely difficult comparisons" for the film unit because of blockbuster summer business in 2005 from such releases as "Charlie and the Chocolate Factory" and "Wedding Crashers." This summer, meanwhile, had such disappointments as "Lady in the Water" and "Snakes on a Plane."

Reif Cohen also said that home video had similarly tough comparisons with "V for Vendetta," "Hoot," "Poseidon" and other titles going up against last year's "Million Dollar Baby" and "Monster-in-Law," among others.

Overall, the Merrill analyst now predicts $180 million in film operating cash flow for the third quarter, which would mean a year-over-year decrease of 26%, compared with her previous forecast for a 16% decline.

Viacom Inc. also faced difficult comparisons at its Paramount Pictures film unit in the third quarter after last year's "War of the Worlds," according to analysts, but several of them have become more bullish on the company's cable networks advertising trends as of late and believe the film unit's turnaround is well on track.

"Our channel checks with ad buyers and sellers suggest a strong cable scatter ad market," Bear Stearns analyst Spencer Wang recently wrote. He added that Viacom's level of recent "ratings improvement is likely better than consensus expectations."

Overall, Reif Cohen raised her third-quarter estimates for Viacom "to reflect improving advertising trends and better-than-expected performance from Paramount's slate." Her new forecasts call for revenue growth of 6%, up from the original 4% estimate, and an operating-cash-flow decline of 2% rather than the previously predicted 7%.

Media investors said they also are looking forward to hearing more from new Viacom president and CEO Philippe Dauman about his vision for the company and what kind of changes he has implemented.

CBS Corp., meanwhile, is expected to bring in "another flattish quarter," as Reif Cohen put it in a recent research report. Continued sluggishness at its radio division is the main culprit, Street sources said.

With CBS expected to finish a slew of radio station sales by year's end, investors are hoping for latest guidance from CBS management on how the company will put its substantial cash war chest to use next year, with most expecting further dividend increases and/or stock buybacks.
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