Wall Street awaits biggies' bounce
Investors want to see real evidence of recoveryNEW YORK -- As publicly traded entertainment giants report their quarterly results during the next two weeks, Wall Street will read the tea leaves even more than usual as investors try to get a better handle on how fast to expect a more tangible recovery of the economy and the advertising market.
Given a rally in many media and entertainment stocks since the market's lows in March, a growing number of people have argued that real evidence of -- rather than just talk of -- improvement is needed now for stocks to continue the upward push.
During the previous quarterly earnings season, many sector CEOs highlighted that advertising seems to have bottomed out and could gain momentum in the back half of the year. But ad conglom CEOs suggested in recent days that ads will return to growth mode only next year.
"We're still down year-over-year even as ad comparisons get easier, and it's increasingly concerning that we aren't seeing that recovery bounce," Pali Research analyst Richard Greenfield said. "That's going to be the real challenge for the whole sector from a stock standpoint over the next three to six months. This earnings season and beyond, it will be interesting to see how management teams begin to alter their body language."
Overall, expect sector biggies to post weaker bottom lines, even though operating profit, which excludes special items, could rise in some cases thanks to cost cuts.
The ad challenges mean that broadcast TV units will be a spot of weakness again this earnings season, while film departments will report mixed figures as a solid boxoffice will often be offset by weaker DVD sales.
Here is a look at some of the key trends and figures expected from the big publicly traded U.S. entertainment firms:
"Second-quarter ads firmed, but Paramount still a drag (Imagine That)," summarized Sanford Bernstein analyst Michael Nathanson in the title of a recent report. The "Imagine" reference is to the expensive recent Eddie Murphy boxoffice flop, for which he expects a write-down of $40 million-$50 million.
UBS analyst Michael Morris expects Viacom's revenue to fall 12% to $3.39 billion, with a 26% drop in operating income to $582 million.
Results are expected to fall right into the broader trend of weaker ad and DVD sales, particularly given a strong year-ago home entertainment performance. Plus, not enough of the better-than-expected boxoffice of recent Pixar release "Up" will fall into the current quarter to offset its marketing costs.
Still, Nathanson expects Disney to exceed Street views. "Under CEO Bob Iger, Disney has been a 'beat' machine with upside surprises in 12 of the last 14 quarters," he said.
Morris predicts a 2.4% revenue decline to $864 million but eyes a 13.8% operating income gain to $258 million.
More than any other entertainment biggie, TW will get questions on possible deal activity -- from its planned separation of AOL this year to a possible sale of parts of the Time Inc. magazine unit and a possible bid for DreamWorks Animation, about which there has been some market chatter.
Morris projects an 8% revenue decline for TW to $6.85 billion and a 14% drop in operating income before depreciation and amortization to $1.38 billion.
With the latest quarter being its fiscal fourth, all analysts' eyes will be on its first operating income guidance for just-started fiscal 2010 and the baked-in ad market expectations.
For the quarter, Morris expects a 9% revenue decline to $7.83 billion and operating income of $934 million, down 37%.
What will the most ad-dependent sector biggie of them all say about the ad market outlook and the stalling upfront?
Most still expect major challenges, even if management often has been bullish. "During the second quarter, we believe ad revenue declined at a similar rate to the first quarter (-16%)," Morris said.
He expects total revenue to be down 10.4% to $3.04 billion, with operating income off 66.8% at $211 million.
The firm recently reported its quarterly results as part of General Electric's earnings, with the cable networks bringing in another solid performance, while the film operation was weaker amid fewer DVD releases and a flop in "Land of the Lost." NBC Uni's second-quarter dropped 41% to $539 million, compared with a 49% decline at GE overall. But the departure of NBC Entertainment co-chairman Ben Silverman, announced Monday, grabbed more attention. Given the strength of NBC Uni's cable networks, few were surprised that Jeff Gaspin expanded his oversight beyond them with the post of chairman, NBC Universal Television Entertainment.