CEO takes key as earnings season arrives
Industry watchers will listen for how bullish top execs soundNEW YORK -- The latest economic data Thursday suggested that the U.S. recession is over, news that comes just ahead of key quarterly earnings reports in which investors will focus on just how much improvement big media and entertainment CEOs see in the advertising market.
U.S. gross domestic product rose at a better-than-expected 3.5% annualized rate during the third quarter, the first gain in a year. The bump comes after recent reports from media analysts talking up improving ad trends and boosting earnings predictions for this year and 2010.
"We expect third-quarter ad results to show an improvement in trends from the second quarter," UBS analyst Michael Morris said. But year-over-year ad comparisons will remain down in many cases, and cost cuts will continue to play a key role.
Industry watchers will listen closely for how bullish CEOs sound, with CBS Corp. president and CEO Leslie Moonves so far the most outspoken about ad improvements and News Corp. chairman and CEO Rupert Murdoch also recently mentioning better traction.
But the latest body language is likely to affect where sector stocks, which have had a strong bounce from March lows, can go through year's end.
After Sony's report Friday, industry earnings season kicks into high gear next week, with Viacom starting things off Tuesday.
Viacom has garnered a range of upgrades of late, with analysts highlighting that the stock is valued below peers and ad trends and margins should improve. Sanford C. Bernstein analyst Michael Nathanson projects that U.S. ad revenue fell 4% during the third quarter after originally expecting a 6% drop. For the film segment, he expects an operating profit of $71 million, "a significant improvement" from a $19 million year-ago loss.
"On the theatrical side, Paramount will benefit from the global success of 'Transformers: Revenge of the Fallen,' " he said. "In addition, because the film was released on June 24, much of the global P&A was expensed in the second quarter."
Overall, Nathanson expects a 5.5% revenue decline at Sony to $3.2 billion but a 6.4% EBITDA gain to $831 million.
On Wednesday, Time Warner will report what Nathanson expects to be a 13.6% decline in adjusted earnings before interest, taxes depreciation and amortization, to $1.7 billion, on a 9.7% revenue drop to $6.8 billion. AOL, publishing and film units are expected to be the biggest drags, and the TV networks segment should be the key bastion of growth. Film profitability could decline 23%, the analyst predicts, citing "tough theatrical comparisons (last year's "The Dark Knight") and weak home video sales," though the 4% U.S. decline for TW during the quarter outperformed a 10% industrywide drop.
Said Barrington Research analyst James Goss: "The fourth period will be the primary period of profit generation, including benefit of home video contributions from 'Harry Potter,' 'Final Destination IV,' 'The Hangover' and several other films."
News Corp. reports later Wednesday, with possible deals -- like a potential acquisition of the Travel Channel -- and a push to paid digital content on people's minds in addition to ad trends.
CBS Corp. follows on Thursday before Disney wraps up earnings season a week later.
Analysts project a slight quarterly revenue decline to about $3.3 billion for CBS. Operating income before depreciation and amortization should decline 14.5% to $551 million, Nathanson predicts. He recently boosted his ad forecast for the back half of 2009 "due to the combination of CBS' ratings-share gains and strengthening scatter pricing." For the third quarter, he eyes a 3% gain in CBS network advertising instead of 1%.