Analysts: Weaker TV Ratings to Remain Entertainment Investor Concern

While network owners cite increased DVR and online viewing as causes, one Wall Street observer says they do so "to make themselves feel better."

Sluggish TV advertising trends outside the Summer Olympics and mostly lower film results were two key trends of the latest quarterly earnings season for Hollywood conglomerates.

But the dominant theme was the weak ratings start to the fall TV season for broadcast networks except for NBC. "During third calendar quarter earnings reports, the main conversation focused on the significant decline in broadcast TV ratings," said Sanford C. Bernstein analyst Todd Juenger.

And the decline has led to industry calls for improved measurement of DVR and online viewing of TV shows.

Following earnings season, which came to an end late last week, Wall Street analysts said in many cases, better-than-expected digital licensing revenue from Netflix & Co. and retransmission revenue made up for any ratings-driven problems.

But while broadcast ratings weakness hasn't hit earnings, and trends may still improve for some, analysts say that the ratings trends will remain a key concern for investors.

Few immediately changed their recommendations on sector stocks despite some reductions to earnings forecasts. But most said they would keep a close eye on future trends and their financial impact.

"People are watching more programming than ever, but they are increasingly time shifting that content through the DVR, streaming and video on demand," said CBS Corp. CEO Leslie Moonves on his company's earnings conference call about the weaker ratings. "Nielsen is doing a good job of finding ways to measure this viewing, but not all of it is captured yet."

Walt Disney CEO Bob Iger mentioned a lack of new hit shows and echoed the key role of "the greater penetration of DVRs and the greater usage of DVRs."

Moonves even vowed that advertisers would end up paying for online and delayed viewing over time.

"Several years ago, we told you that we would monetize [retransmission] and [reverse compensation] in ways that would change our industry," he said. "There were many skeptics. Clearly, we have delivered on that commitment. You should now have full confidence that monetizing all of our viewing is a priority for us and will be a whole new part of our overall growth strategy in the quarters to come."

Several Wall Street observers said they are sceptical about some of the entertainment giants' explanations and promises though.

Juenger expressed his doubts in a report entitled "Math the Broadcast Networks Do to Make Themselves Feel Better."

"The popular explanations [for ratings declines] are increases in unmeasured viewing beyond three days/on unmeasured platforms," he said. "The networks like that narrative. However, while those behaviors are undoubtedly increasing, the biggest reason for declining broadcast ratings is share shift to cable networks."

He suggested that in recent weeks, "increases in cable network ratings fully explain losses in broadcast network ratings."

RBC Capital Markets analyst David Bank focused more on new viewing platforms, but also highlighted the industry challenges. "Are changing viewing habits starting to rattle the cage?," he asked. "Yes. Not only is the call for [live-plus seven days ratings] getting louder by both buyers and sellers, but so is the call for measurement on previously unmeasured devices, such as tablets."

Both analysts suggested that new measurement metrics could have negative short-term impacts on entertainment giants' ad haul, but would improve things longer-term.
Many on Wall Street seem willing to wait to see how things shake out before they downgrade stock ratings.

Janney Montgomery Scott analyst Tony Wible after Disney's earnings report downgraded his stock rating to "neutral" though, citing in part current ABC rating challenges, among other challenges.

Davenport & Co. analyst Michael Morris maintained his CBS Corp. rating and price target, but cautioned: "We still see lower absolute ratings, more ad skipping and greater competition from cable as challenges that are likely to continue for the long term."

Cowen & Co. analyst Doug Creutz reduced his future financials estimates before earnings season though in anticipation of negative ad effects from the ratings. Latest figures were mostly in line with his expectations, but there could be a future impact, he said.

"Management indicated, somewhat surprisingly to us, that CBS is not currently in [an ad] makegood situation despite early-season double digit year-over-year ratings declines," he said. "However, parsing the commentary suggests that advertisers may be giving CBS a bit of an early season pass in the expectation that ratings trends will improve as the season progresses. If they do not, we believe CBS could yet find itself in a makegood situation."

Other analysts have also started to mention ratings concerns in their current stock calls. "With third-quarter results and revisions under our belts," Juenger ranked strong ratings performer and cable network juggernaut Discovery Communications his favorite stock right now.

But he ranks News Corp. only fourth at a  "market-perform," similar to a "neutral," saying "near-term challenges at broadcast [ratings], satellite and publishing make [current fiscal year] guidance a stretch."

Twitter: @georgszalai