Not so upbeat

Recorded music earnings are down

Music stocks hit sour notes and new 52-week lows last week as Wall Street tried to digest another earnings warning from EMI Group.

"How bad can it get?" asked UBS analyst Ian Whittaker in a research note, echoing the thoughts of many peers when faced with what EMI said would be a 15% decline in recorded music revenue for its latest fiscal year, driven by weak markets in North America.

He cut his price target on EMI shares and downgraded his earnings-per-share forecasts by 64% for the fiscal year that ends March 31, by 36% for the following year and 27% for the year after that.

Whittaker also suggested that EMI could cut its dividend due to the earnings shortfall.

The U.S. sluggishness mentioned by EMI may be partly due to its release schedule, but analysts also expect it to affect Warner Music Group.

Said Pali Research analyst Richard Greenfield: "While WMG is better managed than EMI, WMG is more exposed to the declining U.S. market, with 40% of WMG's revenues coming from North America" compared with EMI's 33%.

The analyst also pointed out a "continued fall" in CD sales year-over-year for the industry overall "despite comparisons that have eased significantly," causing him to fear that the music market is indeed under more fundamental pressures. Wall Street music chatter has also centered on the health of digital music sales as of late, with some analysts having expressed concern that WMG's digital revenue in its latest quarter was up year-over-year but down slightly compared with the previous quarter.

However, some have argued that the strength of current releases affects digital sales just as much as it does physical sales. Deutsche Bank analyst Doug Mitchelson, for example, recently said that WMG's sequential decline was "due to the lack of major releases, though flattish recorded digital sequentially is impressive in that light."

Some even see a potential benefit in the renewed music market worries, saying that EMI and WMG may see it as the final nudge to merge.

"The silver lining here is that the warning has probably increased the chances of a tie-up between Warner Music and EMI, partly as it shows the difficulties facing the recorded music market, partly because it leaves EMI more vulnerable," Whittaker argued.

But Greenfield argued, "the combined company is not attractive."
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