Hollywood Prepares for Earnings Season a Year After Cord-Cutting Fears Slammed Stocks

A year after Disney's ESPN commentary caused sector stocks to plunge, M&A, the Brexit and weaker box office are among the likely trends of financial updates.

As Hollywood conglomerates prepare for second-quarter earnings season, some on Wall Street are wondering if the latest results will lead to a strong investor reaction like last summer.

Back then, sector stocks practically went into free-fall after Walt Disney disclosed subscriber losses at sports juggernaut ESPN, unnerving investors about the impact of cord cutting. Players like Disney, Viacom and others in the TV business have had a tough time trying to assuage Wall Street fears ever since.

"Last August’s sell-off in media stocks was unlike anything we have ever witnessed," said MoffettNathanson analyst Michael Nathanson in a recent investor note. "While the market’s negative reaction to Disney’s comments about ESPN subscriber losses was stunning, we were just as surprised that investors hadn’t seen this coming. Around this time last year, the only positive media trend we could identify was the strength of the U.S. box office."

By comparison, cable networks ratings were weaker, TV advertising "barely showed a pulse as the new normal of zero percent growth began to sink into models" and U.S. pay TV subscriber growth "was about to turn decidedly negative," he recalled.

Fast forward a year, and "it feels like the narrative has been flipped a bit," said Nathanson. U.S. box office was weaker than expected in the second quarter, while cable TV ratings and national TV advertising have been on an upswing. Pay TV subscriber trends continue to see slight annual declines. 

But with the Street already cautious on the sector, some predict any stock moves this earnings season likely won't be as significant as last summer.

So, what will earnings season bring? Analysts expect more talk about pay TV subscriber trends and recent and possible further industry consolidation, including Charter's recent acquisition of Time Warner Cable. There will be some insight into the impact of the Brexit, which pulled down the British pound late in the quarter in a move that will affect financials at Discovery Communications, 21st Century Fox and others with big international exposure. And there are questions about whether advertising trends can remain as strong as they have been.

Many on Wall Street expect no major surprises for the latest quarter, meaning investors will closely listen to CEOs' commentaries and expectations to gauge where to put their money now that the second half of the year is off and running. Nathanson, for one, forecasts earnings revisions to the downside at many sector players, which could drive stocks lower.

Morgan Stanley analyst Benjamin Swinburne on Tuesday reiterated his "cautious" industry view. "Fundamentally, we expect continued deceleration in subscription revenue growth across TV networks, while TV advertising’s renaissance versus digital meets with some idiosyncratic headwinds and tough compares," he wrote. And FBR & Co. analyst Barton Crockett on Tuesday updated his stance on sector stocks, saying "the data remains supportive of the notion of persistent pressure" in the industry.

Michael Morris, an analyst at Guggenheim Securities, said that he sees "management commentary as key to forecasting second-half and 2017 actions. He sees two possible positive talking points for CEOs on earnings calls: new entrants into the content distribution sector and M&A. "Progress on [the] Hulu virtual [pay TV service launch in early 2017] and AT&T/DirecTV streaming services and uptake of incremental services (Sling, Sony Vue) are expected to be met with positive commentary that these products represent additional demand for networks," said Morris.

On M&A, he said "comments are likely to be restrained, though more constructive postures from CBS (possible Viacom re-combination), Fox and smaller channels owners (Discovery, Scripps Networks and AMC Networks) should drive sentiment."

Here is a closer look at what to expect from Hollywood conglomerates this earnings season.

NBCUniversal
Cable giant Comcast and its entertainment arm NBCUniversal will open quarterly earnings season for Hollywood giants on Wednesday morning.

Wells Fargo analyst Marci Ryvicker projects operating cash flow at NBCU to fall 7.7 percent to $1.67 billion on lower revenue, with film results expected to be down sharply after strong year-ago performers, such as Jurassic World and Furious 7.

On the TV side, Sanford C. Bernstein analyst Todd Juenger said NBCU's cable networks group saw its second-quarter ratings drop 10 percent, while NBC's broadcast ratings fell 4 percent. Wunderlich Securities analyst Matthew Harrigan still expects NBCU's operating cash flow to be down only slightly overall in the second quarter.

The earnings call is likely to feature upfront advertising sales questions, as well as talk about the upcoming Rio Summer Olympics and the company's planned acquisition of DreamWorks Animation, which it had announced after its first-quarter earnings report.

CBS Corp.
The company led by chairman and CEO Leslie Moonves reports its latest results after the market close on Thursday.

RBC Capital analyst Steven Cahall expects core network advertising growth of 5.3 percent and higher retransmission fee revenue, with analysts also citing upside from content licensing. Cable networks unit revenue will be hurt in comparison to the year-ago Mayweather-Pacquiao fight, but profit should be helped by the lower expenses compared with that fight.

Overall, Jefferies analyst John Janedis expects CBS to post earnings per share of 87 cents, a cent above the First Call consensus and compared with 67 cents per share in the year-ago period, or 74 cents on an adjusted basis.

The Street also expects Moonves to tout upfront ad sales trends. But will he comment on suggestions that CBS and Viacom, both controlled by Sumner Redstone via his National Amusements, could once again merge?

Time Warner
Jeff Bewkes-led Time Warner is set to post its latest financials before the market opens on Aug. 3.

Time Warner recorded earnings of $1.25 per share from continuing operations in the second quarter of 2015. This quarter, Janedis calls for $1.18, with the Street expecting $1.17 on average.

Turner should benefit from 6.2 percent estimated ad growth and a projected 10.0 percent subscription gain, while HBO will be affected by a 31 percent drop in content revenue, driven by a decline in Amazon Prime SVOD revenue, according to the analyst. He also expects film unit profit to fall 47 percent from the year-ago period "given the timing of the film slate, but more significantly the tough gaming comp in the year ago quarter."

The biggest film releases from the company in the quarter were Central Intelligence and The Conjuring 2, while the year-ago period had included San Andreas and Mad Max: Fury Road.

21st Century Fox
Rupert Murdoch's Fox continues the earnings parade on the same day as Time Warner, but after the market close.

X-Men: Apocalypse and Independence Day: Resurgence, which Janedis highlighted fell "short of box-office expectations," will play into film unit results.

Fox News, which could draw questions following Roger Ailes' departure and Murdoch's decision to oversee it directly for now, is expected to be a positive in the cable networks unit. But analysts said higher expenses at Fox International Channels and in India could affect the bottom line.

Janedis expects Fox to report overall earnings of 37 cents per share, compared with the 39 cents Street consensus and the year-ago figure of 6 cents, or 39 cents on an adjusted basis.

Viacom
On Aug. 4, Viacom will address its latest figures, and analysts are expected to ask CEO Philippe Dauman about his take on his showdown with controlling shareholder Sumner Redstone and his daughter Shari and the hoped-for sale of a Paramount Pictures stake that the Redstones are opposed to.

Janedis expects earnings of $1.00 per share, below the $1.04 Street consensus, and well down from the $1.47 per share from continuing operations reported in the year-ago period. He projects a film unit loss "due to the box-office weakness of Teenage Mutant Ninja Turtles 2."

Based on preliminary information, Viacom had warned last month that it would report adjusted diluted earnings per share of approximately $1.00-$1.05 for the quarter. It said results will be "impacted by the theatrical underperformance" of TMNT2, as well as "a delay in completing a significant SVOD agreement."

Walt Disney
Walt Disney will wrap up Hollywood conglomerate earnings season on Aug. 9.

"Following a rare miss last quarter, we expect Disney to once again beat Street estimates, led by studio results in both theatrical and home entertainment," Cahall wrote in a preview report. "However, we think the narrative will once again shift to the soft spots rather the bright spots including the macro impact on domestic parks and resorts in fiscal year 2017 and subscriber growth at cable nets."

He expects all units' profitability to rise 6.1 percent, driven by film, broadcasting and consumer products, partially offset by lower cable networks and theme parks results. The film unit benefited from the box-office success of Captain America: Civil War, Zootopia and The Jungle Book, as well as Finding Dory late in the quarter, while Alice Through the Looking Glass disappointed.

Janedis estimates earnings per share of $1.60, compared with First Call's $1.61 expectation and the $1.45 recorded in the year-ago period.

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