Hollywood Earnings Preview: Conglomerate Stocks, Outlook in Focus
Wall Street is looking for latest commentary from the CEOs of Time Warner, Disney, CBS Corp. and others on the ad market, pay TV sub trends, digital licensing and carriage disputes.
Wall Street is gearing up for a big earnings week for Hollywood conglomerates, which will allow CEOs of sector biggies to discuss latest business trends as stocks continue to fly high and trade near all-time or multi-year highs.
"We remain bullish given the outlook of double-digit affiliate revenue growth, rising ancillary and international monetization and increasing return of capital levels," said Morgan Stanley analyst Benjamin Swinburne in his preview of third-quarter earnings season. "To this, we add an expectation of accelerating global advertising growth in 2014."
Discussing licensing revenue from subscription VOD platforms, such as Netflix, Swinburne wrote: "Growth in 2014 is not a given. That said, we thought 2013 would be flat, but now appears [to be] up 25 percent."
But he warned about continued pay TV subscriber losses, which affect TV networks groups. "We expect 2013 will be the first year of pay TV sub losses, putting media’s roughly $40 in monthly revenues per household at risk if cord cutting picks up," Swinburne wrote. "International has been a tailwind, led by emerging markets, but we are seeing slowdowns in markets like Brazil (about 10 percent of cable net revenues) and foreign exchange headwinds, which could offset an accelerating Europe. Finally, even relative to the market, valuation levels are at post-recession peaks."
The Morgan Stanley analyst continues to have "outperform" ratings on the stocks of CBS Corp., 21st Century Fox and Time Warner though, saying they "offer investors above average or accelerating affiliate revenue growth. Leading this charge is the continued transformation of the broadcast business through retransmission fees, which have grown faster than expected."
UBS analyst John Janedis similarly wrote in a recent report: "We continue to think the results/tone [during earnings season] will be positive enough to keep the positive thesis intact for the group, though multiples continue to make multi-year highs in many cases."
He added: "From a business model threat perspective, Aereo remains at the top of the list, though we believe it will be several years until the legal battle winds through the courts."
But Sterne Agee analyst Vasily Karasyov recently predicted that "the time for group-wide multiple expansion may be over and individual stocks’ performance will increasingly diverge."
He suggested that investors should favor "stocks with upside driven by earnings per share growth," such as 21st Century Fox and Viacom, "stocks with biggest potential upside to estimates," such as Viacom, and "stocks with a catalyst," such as Time Warner, which will next year spin off its Time Inc. publishing arm.
After last week's results from two conglomerates that own studios as part of a broader-based business portfolio – Sony Corp. and NBCUniversal owner Comcast, next week will shine a spotlight on entertainment conglomerates. 21st Century Fox will kick off quarterly earnings season on Tuesday, followed by Time Warner and CBS Corp. on Wednesday and Walt Disney on Thursday. Viacom will wrap up the earnings parade on Thursday Nov. 14.
Here is a look at what to expect from the company reports.
21st Century Fox:
Rupert Murdoch's entertainment company saw bottom line challenges in its latest quarter from higher programming investment and marketing spending related to the rebranding of cable networks, such as Fox Sports 1, FXX and FXM, as well as attempts to boost Fox broadcasting network ratings. "There are also some headwinds from foreign currency exposure to the Brazilian real and the Indian rupee," according to ISI Media.
Jayant and Joyce predict cable network segment operating profit could rise 3 percent for the quarter, while broadcasting could record a 5 percent improvement due to retransmission fees and reverse compensation revenue.
In the film unit, such theatrical releases as The Wolverine and Percy Jackson: Sea of Monsters mean tough comparisons to the fourth Ice Age film in the year-ago period, leading analysts to predict a small operating profit decline.
Overall, ISI Media expects revenue growth growth of 13.5 percent and a 1 percent decline in operating profit. Before depreciation and amortization, operating profit could be up 4.5 percent though, according to the firm.
TW's third-quarter results should benefit from theatrical releases Man of Steel, We’re the Millers and The Conjuring. "There were no notable TV syndication sales, and the cable networks’ summer viewership was in-line," says the ISI Media team. It predicts 6.9 percent TV network unit ad revenue growth, but also higher programming expense for new originals and sports rights.
Overall, ISI Media forecasts revenue and operating profit to grow 2 percent and 2.5 percent, respectively.
Stifel, Nicolaus analyst Drew Crum predicts adjusted earnings per share of 89 cents, up from 84 cents in the year-ago period, on virtually unchanged revenue of $6.81 billion. "We expect contributions from networks, lower interest expense and accretion from share buybacks to drive performance," he says.
On the earnings call, he suggests investors listen out for an update on HBO subscriber trends, the TV syndication pipeline and comments on a new film financing deal with Dune, Brett Ratner's RatPac and Australian billionaire James Packer.
ISI Media analysts Vijay Jayant and David Joyce predict that CBS shares may benefit from "third-quarter programming syndication sales, which we believe could be up 27 percent…and from retransmission fees (up 25 percent)."
CBS was widely seen as having won a carriage fee dispute with Time Warner Cable, which reported increased subscriber losses for the third quarter. "However, the retransmission fee/cable network carriage dispute with Time Warner Cable, which resulted in a one-month blackout of CBS properties on TWC systems, served as a local advertising headwind" for CBS, the analysts say. "Being dark in TWC markets such as New York City and LA also prevented a tentpole summer miniseries, Under the Dome, from even stronger ratings (and advertising revenue) than it actually generated."
That and tough political comparisons could leave local TV station ad revenue down 1 percent in the third quarter, they estimate.
Crum overall estimates earnings per share of 76 cents, up from 64 cents in the year-ago period, on revenue of $3.57 billion, up 9 percent.
He advises investors to look for commentary on the ad environment, the impact of the TWC blackout and the "syndication pipeline, including discussion on content deals with SVOD operators."
The ISI Media analysts say it was "a challenging quarter" for the company. "Sentiment should improve in 2014 as attention turns to 2015 theatrical releases (Star Wars and Pixar franchises) and the completion of the Shanghai park."
The latest quarter is likely to provide some negative headlines though. "The studio division writedown and operating losses from the poor Lone Ranger box office results ($260 million worldwide versus a $215 million production budget), combined with an estimated $45 million of home entertainment headwinds we derive from the box office conversion ratio for last year’s The Avengers versus this year’s Iron Man 3 make for difficult comparisons," they say. "Yet we think the studio could generate $55 million of operating income."
In Disney's TV networks business, the latest quarter included a lack of deferred affiliate revenue at ESPN. Plus, "broadcast network advertising revenue was possibly down 2.6 percent in a seasonally weak quarter, and syndication revenue faced perhaps around $40 million of headwinds from last year’s sales of Castle and Wipeout versus this year’s Scandal."
Finally, Disney's cable networks ratings in the quarter were "a mixed bag," according to the ISI team.
Among the potential positive trends, they mention Disney's Interactive Media unit, which they say "could make progress toward breakeven on the back of the Infinity multi-platform game launch," and positive theme parks momentum.
Overall, Disney's quarterly revenue and operating profit could be up 6 percent and 7 percent, respectively, ISI Media believes.
Crum's quarterly estimates include earnings of 76 nets per share, up from 68 cents in the year-ago period, and revenue of $11.38 billion, which would mean a 6 percent gain.
Cable networks ratings and advertising should report sequential improvements, analysts predict. Continued revenue from the release of World War Z late in the previous quarter should also once again benefit the film unit.
U.S. ad revenue could have grown 7.5 percent in the latest quarter, according to ISI Media. "International ad revenue could be up 2.8 percent due to foreign exchange headwinds," it says.
All of this could lead to a 9 percent TV networks operating profit gain and 32 percent film unit improvement as much of the expense for World War Z was recognized in the previous quarter. ISI Media expects Viacom's revenue to be up 8 percent, with operating profit up 15 percent.