• The Hollywood Reporter on LinkedIn
  • Follow THR on Pinterest

Hollywood Earnings Preview: Conglomerate Stocks, Outlook in Focus

Page 1
Man of Steel Cavill Traue inspecting Adams- H 2013
Warner Bros. Pictures
"Man of Steel"

Wall Street is looking for latest commentary from the CEOs of Time Warner, Disney, CBS Corp. and others on the ad market, pay TV sub trends, digital licensing and carriage disputes.

Wall Street is gearing up for a big earnings week for Hollywood conglomerates, which will allow CEOs of sector biggies to discuss latest business trends as stocks continue to fly high and trade near all-time or multi-year highs.

"We remain bullish given the outlook of double-digit affiliate revenue growth, rising ancillary and international monetization and increasing return of capital levels," said Morgan Stanley analyst Benjamin Swinburne in his preview of third-quarter earnings season. "To this, we add an expectation of accelerating global advertising growth in 2014."

Discussing licensing revenue from subscription VOD platforms, such as Netflix, Swinburne wrote: "Growth in 2014 is not a given. That said, we thought 2013 would be flat, but now appears [to be] up 25 percent."

But he warned about continued pay TV subscriber losses, which affect TV networks groups. "We expect 2013 will be the first year of pay TV sub losses, putting media’s roughly $40 in monthly revenues per household at risk if cord cutting picks up," Swinburne wrote. "International has been a tailwind, led by emerging markets, but we are seeing slowdowns in markets like Brazil (about 10 percent of cable net revenues) and foreign exchange headwinds, which could offset an accelerating Europe. Finally, even relative to the market, valuation levels are at post-recession peaks."

The Morgan Stanley analyst continues to have "outperform" ratings on the stocks of CBS Corp., 21st Century Fox and Time Warner though, saying they "offer investors above average or accelerating affiliate revenue growth. Leading this charge is the continued transformation of the broadcast business through retransmission fees, which have grown faster than expected."

UBS analyst John Janedis similarly wrote in a recent report: "We continue to think the results/tone [during earnings season] will be positive enough to keep the positive thesis intact for the group, though multiples continue to make multi-year highs in many cases."

He added: "From a business model threat perspective, Aereo remains at the top of the list, though we believe it will be several years until the legal battle winds  through the courts."

But Sterne Agee analyst Vasily Karasyov recently predicted that "the time for group-wide multiple expansion may be over and individual stocks’ performance will increasingly diverge."

He suggested that investors should favor "stocks with upside driven by earnings per share growth," such as 21st Century Fox and Viacom, "stocks with biggest potential upside to estimates," such as Viacom, and "stocks with a catalyst," such as Time Warner, which will next year spin off its Time Inc. publishing arm.

After last week's results from two conglomerates that own studios as  part of a broader-based business portfolio – Sony Corp. and NBCUniversal owner Comcast, next week will shine a spotlight on entertainment conglomerates. 21st Century Fox will kick off quarterly earnings season on Tuesday, followed by Time Warner and CBS Corp. on Wednesday and Walt Disney on Thursday. Viacom will wrap up the earnings parade on Thursday Nov. 14.

Here is a look at what to expect from the company reports.

21st Century Fox: 

Rupert Murdoch's entertainment company saw bottom line challenges in its latest quarter from higher programming investment and marketing spending related to the rebranding of cable networks, such as Fox Sports 1, FXX and FXM, as well as attempts to boost Fox broadcasting network ratings. "There are also some headwinds from foreign currency exposure to the Brazilian real and the Indian rupee," according to ISI Media. 

Jayant and Joyce predict cable network segment operating profit could rise 3 percent for the quarter, while broadcasting could record a 5 percent improvement due to retransmission fees and reverse compensation revenue. 

In the film unit, such theatrical releases as The Wolverine and Percy Jackson: Sea of Monsters mean tough comparisons to the fourth Ice Age film in the year-ago period, leading analysts to predict a small operating profit decline. 

Overall, ISI Media expects revenue growth growth of 13.5 percent and a 1 percent decline in operating profit. Before depreciation and amortization, operating profit could be up 4.5 percent though, according to the firm.