Analysts Expect Slower TV Ad Growth in Latest Hollywood Conglomerate Earnings Reports

Wall Street also predict mixed film results for the second quarter and more clarity on whether sector stocks have more upside.

A slowdown in advertising growth momentum and a 1 percent box office decline will be among the key factors affecting the latest quarterly financials of entertainment conglomerates, according to analysts.

Meanwhile, the outlook for TV ratings and ad momentum and the latest commentary on recent network carriage disputes will be among the topics expected to play important roles on management teams' earnings conference calls. And following last week’s Colorado shooting at a screening of The Dark Knight Rises, some CEOs may face questions about their future expectations for cinema security and attendance.

But one overarching question that Wall Street will keep in focus is whether Hollywood conglomerate stocks have more upside amid continued economic and ratings challenges.

"Macro fears dominate sentiment, but we believe domestic TV advertising remains reasonably resilient with variances fueled mainly by ratings,” said Lazard Capital Markets analyst Barton Crockett. “We remain constructive - seeing fears as worse than trends."

"Over the past few weeks we have lowered our ad growth estimates for most of the companies in our coverage universe, but have left [operating profit] essentially unchanged, assuming lower than expected expenses largely offset top-line weakness," said UBS analyst John Janedis though. "With the recent upfront finishing modestly below expectations, Olympics taking money out of the market and slightly weaker scatter pricing, we think there is modest risk to third-quarter revenue estimates as well."

Echoed Cowen analyst Doug Creutz: "With recent U.S. macro data weakening, we remain highly attuned to any evidence that television advertising might be coming under pressure. However, we believe current trends remain largely benign, with political spending likely to support advertising growth through November."

In his look ahead at earnings season, Nomura's Michael Nathanson said that media and entertainment stocks gained during the first half of the year, but only CBS Corp. managed to get Wall Street to raise its financial estimates. "In order to fuel the [stocks] rally further, earnings numbers need to start moving up, yet we do not see the scope for positive earnings revisions for the second-quarter reporting season," he said.

But Barclays Capital analyst Anthony DiClemente expects the latest earnings season to confirm his view that stock prices for industry players are appealing. "While investors may be deterred from adding to media positions given concerns about Europe, foreign exchange headwinds and/or a related slowdown in global advertising growth, we believe media stocks now price in these concerns," he wrote in a recent report. "TV advertising remains more resilient than other ad sectors, affiliate fees are consistently growing, capital returns are robust and technology may begin to work in favor of media."

The quarterly parade of financial reports from Hollywood biggies will kick off on Aug. 1 with latest figures from Time Warner and NBCUniversal controlling shareholder Comcast, with Wall Street having tweaked many of its expectations in recent weeks.

Nathanson highlighted that the second-quarter box office trends ended stronger than expected "given outperformance from a couple of releases, including Universal’s Ted and Time Warner’s Magic Mike." Overall, the quarter finished down 1 percent, he said.

"Sustained strength" from The Avengers was "unable to mask poor theatrical performances by Universal’s Battleship and Sony’s MIB3 and strong 2011 titles - Pirates of the Caribbean: On Stranger Tides and The Hangover II, Nathanson said. "On a company level, Disney, Lionsgate and Sony led the way, but this was offset by difficult comparisons at News Corp., Universal and Time Warner."

On the home entertainment side, unit sales in the quarter were down 14 percent through mid-June, which the analyst called "a meaningful deceleration from the mid single digit declines in the first quarter and high single digit decline in the fourth quarter."
Overall, on a studio level, NBCUniversal "led its peers as the only studio in positive territory with 12 percent growth," he said.

Meanwhile, TV ad growth, key for conglomerates as a majority of their profits come from cable networks, continued, but at a lower level. "We expect national broadcast and cable network advertising to decelerate from the first to the second 2.2 percent," Nathanson predicts. "Some of this slowdown is related to timing of sports games (NCAA Final Four) and other event programming (Viacom's Kids Choice and BET Awards).  However, we believe that a slowing scatter market is the common cause of deceleration across our media companies."

Here is look at what to expect from key Hollywood conglomerates:

Time Warner:

Time Warner will report its earnings before the stock market opens on Wednesday, Aug. 1.

Nathanson recently cut his earnings per share forecast by 3 cents to 57 cents saying that "upside at networks is offset by lower film and publishing estimates." He expects the company to post a revenue decline of 1 percent.

In the core TV networks unit, TW's target demo ratings in the quarter dropped 10 percent on a revenue weighted basis, "although they improved throughout the quarter, ending up down only 4 percent in June," the analyst highlighted. "CNN ratings remain under pressure with the lack of big news events and less early interest in its election coverage."

TW's second-quarter film slate, meanwhile, "underperformed with Dark Shadows and Rock of Ages, although Magic Mike at the end of the quarter was a nice surprise," Nathanson said. "The second quarter faces difficult comparisons with Hangover II and Green Lantern’s box office last year."

CBS Corp.:
CBS Corp. will report its second-quarter earnings after the market close on Thursday, Aug. 2 following a morning report from Sony Corp.

Nathanson expects earnings per share of 60 cents, compared with a 59 cents consensus, and a 1 percent revenue decline.

"We are decreasing our second-quarter cable networks estimates to better reflect the difficult comparisons last year from the international sales of Showtime programming," he said in a report. "However, this is offset by higher entertainment operating cash flow margins as we expect another strong quarter driven by higher retrans and underlying advertising growth of 4 percent at the CBS broadcast network."

Due to the timing of the Final Four semifinal games that fell into the first quarter this year, he expect a $50 million financial headwind. Another financial challenge in the second quarter: "Syndication revenue will face the first quarter of Netflix digital streaming money kicking in last year as well as a second cycle  sale."

On the positive side, Nathanson expects TV station revenue to rise 9 percent and only a 2 percent radio decline.

Viacom is set to report its fiscal third-quarter earnings early on Friday, Aug. 3.

Nathanson expects lower advertising revenue at the company's core cable networks amid continued ratings weakness at Nickelodeon and other channels.

"Ratings in quarter continued to be challenged, down 13 percent on a revenue weighted basis with all major networks in the negative territory led by Nickelodeon (down 30 percent) and MTV (down 8 percent)," Nathanson said.

On the film side, "lower costs from shifting G.I. Joe 2 out of the quarter should help offset underperformance of The Dictator," he said.

Of course, Viacom's brand-new settlement of its carriage dispute with DirecTV could also be a topic to come up during the earnings call with analysts.

Walt Disney:
Disney will report earnings after the market close on Tuesday, Aug. 7.

Nathanson recently raised his earnings per share estimate for the quarter to 93 cents thanks to the success of The Avengers "offset somewhat by lower broadcast and parks estimates."

And Credit Suisse's Spencer Wang raised his by 3 cents to 92 cents. He also expect a nearly 9 percent revenue gain.

Higher ad growth thanks to better ESPN ratings and improved consumer products will be key benefits in the quarter, according to analysts. That will help offset higher expenses at ABC, Nathanson said.

But Wang highlighted improving film unit trends and the fact that Disney had the "by far the strongest" ratings momentum out of all conglomerates in the latest quarter.

News Corp.:
The Rupert Murdoch-led conglomerate will report its financials for its fiscal fourth quarter and fiscal year after the market close on Aug. 8.

Nathanson recently lowered his profit forecast by a penny to 31 cents per share.

Quarterly broadcast TV operating profit will decline 11 percent due to Fox network ratings declines and slightly weaker TV station advertising trends that will mean a 2 percent revenue decline, he expects.

On the positive side, News Corp. "was the only other company to register revenue-weighted ratings growth in the quarter" besides Disney, Wang said.

The cable networks will see continued strength though with U.S. affiliate growth of 15 percent and ad gains of 10 percent, Nathanson estimates. Overall, he projects cable network revenue growth of 15 percent and operating profit growth of 32 percent.

In the film unit, upside from Prometheus was offset by "disappointing" box office for Abraham Lincoln: Vampire Slayer, and "News Corp. faces very difficult comparisons to last year with the success of Rio" and the headwind of costs for Ice Age 4, Nathanson said.

Analysts and reporters will on the News Corp. call look for latest updates on the cost and fallout from the phone hacking scandal and any latest plans for the management structure after the proposed split into an entertainment and a publishing company.


Twitter: @georgszalai