Hollywood Conglomerates Set to Report Earnings Amid TV Concerns

With ratings down, one analyst cut his estimates "virtually across the board, primarily as a result of lower ad growth expectations"

Entertainment conglomerates will report their latest quarterly earnings over the coming week amid TV ratings declines and weaker advertising growth that have analysts discussing the industry's financial outlook.

Starting with Rupert Murdoch's 21st Century Fox on Tuesday, all Hollywood biggies will release their latest financials over the coming days.

Morgan Stanley analyst Benjamin Swinburne on Monday updated his industry estimates and removed CBS Corp.'s stock from his firm's "best ideas" list "due to ad exposure," but maintained his "overweight" rating on the stock.

"We lower our advertising outlook across the media coverage group and now assume a national TV five-year compound annual growth rate of 2 percent (for 2014-2018) and other traditional (print, radio, outdoor) declines at 5 percent annually," he wrote. "We think online video remains a small driver of TV’s slowdown in the context of slower overall ad spending." He also continues to recommend shares of Fox and Time Warner to investors.

Read more NBCUniversal Third-Quarter Earnings Rise Amid Growth at Broadcast TV Unit

Nomura analyst Anthony DiClemente also recently wrote: "A confluence of factors have driven post-Labor Day underperformance for media stocks, including 1) persistent broadcast and cable TV ratings declines; 2) the prospect of incremental ad demand shifting from TV to digital media."

He said about sector stocks: "We await evidence of core TV ad demand strength, steady video subscriber adds and TV ratings growth before getting more positive."

Given that cable networks units are entertainment conglomerates' big earnings drivers, others have also cited similar concerns.

Sanford C. Bernstein analyst Todd Juenger echoed that "all focus is on secular trends" this earnings season, saying he "took our estimates down virtually across the board, primarily as a result of lower ad growth expectations."

He wrote: "Aggregate TV audience deliveries took an abrupt, unprecedented drop in the third quarter, down 10 percent year-over-year. We fear this is evidence of a structural/secular decline for TV advertising: less ad inventory to sell, and no pricing power in the face of growing alternatives."

And Cowen & Co. analyst Doug Creutz wrote in an earnings preview: "We remain cautious on the big media space due to worsening fundamentals. Most notably, we now believe that digital media is pulling advertising dollars away from national TV."

Comcast already reported its latest quarterly financials for its NBCUniversal entertainment arm, and so did Sony Corp. for its film unit.

Read more Sony Posts Lower Quarterly Film Unit Loss, Cuts Full-Year Forecast

Fox on Tuesday will kick off earnings season for pure-play entertainment companies, followed by Time Warner and CBS on Wednesday and Walt Disney on Thursday, followed a week later by Viacom.

"In cable, Fox's portfolio of networks and [Time Warner's] Cartoon network were the big winners, up 23 percent and 5 percent for the quarter, respectively," wrote Juenger. "Fox had the only positive performance of any network group in prime 18-49." He added: "Fox was helped significantly by its rebranding efforts, particularly at FXX, which began running The Simpsons marathons in late August. Outside of FXX, all Fox [cable] networks grew ratings for the quarter with the exception of Fox Business News."

Broadcast was a very different story, "with all major networks up for the quarter except Fox," Juenger said. "Football continues to prove its worth, with both NBC and CBS exhibiting strong September growth. Fox's broadcast ratings woes have yet to subside, with several notable fall premiere disappointments … and weaker ratings for returning series New Girl and The Mindy Project."

The film units of Hollywood conglomerates, meanwhile, had weak box-office performances in the third quarter. "Most studios' U.S. box office takes this quarter were down significantly year-over-year in what was the worst third-quarter domestic box-office showing since 2006 (not inflation adjusted)," Juenger wrote. The notable exceptions were Viacom's Paramount and Disney, while Fox was unchanged from last year.

Read more Starz Third-Quarter Earnings Rise, Total Subscriptions Drop

"Viacom's domestic box office was up more than 300 percent due to a particularly easy comp this year with Teenage Mutant Ninja Turtles and Hercules comping no in-quarter releases in 2013," the analyst wrote. "Disney's domestic box office was up 70 percent largely due to the success of Guardians of the Galaxy relative to last year's disappointing showing for The Lone Ranger."

One key topic of debate on earnings conference calls this quarter is likely to be the outlook for online-only video services from CBS and HBO and possible similar services from competitors.

Email: Georg.Szalai@THR.com
Twitter: @georgszalai