'R-word' spells trouble for biz

Recession on congloms' radar

A looming recession, the writers strike and how they will affect sector players this year are questions that investors are keying in on as U.S. media and entertainment conglomerates report their latest quarterly earnings in the coming weeks.

Buzz about a possible recession, which traditionally hits advertising revenue that media firms rely on, has been sweeping Wall Street in recent weeks (HR 1/23). Many saw their fears confirmed Wednesday as the Commerce Department said that gross domestic product growth, a key measure of the strength of the economy, suddenly slowed in the fourth quarter to 0.6%, compared with 2.2% for the whole year.

Another widely expected aggressive interest rate cut by the Federal Reserve on Wednesday also showed that Washington sees continued need to support economic momentum.

Media and entertainment stocks already have declined sharply in recent months as they often do ahead of an official confirmation of a recession, even though some warn economic gains could be sustained.

"Wall Street and the media might be talking us into a recession that isn't here yet and may not happen," said Hal Vogel, president of Vogel Capital Management.

With that backdrop, General Electric-owned NBC Universal recently reported its fifth quarter in a row of profit growth and said it has not seen any damage from the economy and strike (HR 1/21). Another conglomerate with more than just entertainment operations is set to present its latest results today as Sony discusses its business trends.

On Monday, the first pure-play media biggie reports — News Corp.

Goldman Sachs analyst Ingrid Chung recently said that the company "continues to be on track for a seventh consecutive year of double-digit operating income growth" in its current fiscal year. The fiscal second-quarter earnings should be up 12% year-over-year to $1.3 billion, driven by strong television and Fox Interactive Media momentum, she expects. And that even though Chung eyes only a 1% revenue uptick to $7.9 billion.

What many will look for, however, is guidance on the looming recession. News Corp. chairman and CEO Rupert Murdoch said last year that he expects an economic slowdown, but his president and COO Peter Chernin recently signaled this hasn't hurt advertising trends at News Corp.

Chung, for one, already has included a "recession-driven slowdown in calendar-year 2008 advertising growth" in her earnings models for News Corp.

Analysts expect the conglomerate's film unit to report double-digit revenue and operating income declines for the latest quarter because of a more limited DVD release slate and tough comparisons with the year-ago period, which included the theatrical run of "Borat." However, "Alvin and the Chipmunks" and surprise hit "Juno" provided some cushion for the film unit, according to Wall Street.

Although film comparisons and recession concerns also are the theme going into Disney's latest quarterly earnings report, Citi Investment Research analyst Jason Bazinet this week downgraded Disney shares to a rare "sell" rating, saying the weak U.S. economy already is showing signs of dragging down the firm's theme parks business.

However, Disney management in a TV appearance refuted such fears. This in part caused Pali Research analyst Richard Greenfield to feel elated. "We're finally 'Enchanted' by the Mouse," he wrote in a research note Wednesday and upgraded Disney shares to a "buy."

Chung expects Disney to report a strong 14% quarterly operating income growth when excluding the film studio, "where it faces difficult comps and timing of international home video." Including the film business, she eyes revenue of $10 billion, up 5% year-over-year, and operating income of $1.9 billion, up 3%, roughly in line with Street consensus expectations.

"Media networks, theme parks and consumer products will each drive double-digit operating income growth despite a slowing macro environment … driven by strong pricing for ABC primetime, theme parks margin expansion, and 'High School Musical' and 'Hannah Montana,' " she said.

Meanwhile, Time Warner investor sentiment has been driven more by a potential re-engineering of the company via asset sales and spinoffs, and Wall Street will look for possible latest guidance on those in the firm's quarterly earnings call. Barrington Research analyst James Goss recently called TW one of his firm's "best ideas for 2008" based on his expectation that new CEO Jeff Bewkes will make "the more dramatic structural changes some would like to see."

Similarly, Chung expects "relatively lackluster fourth-quarter results and conservative 2008 guidance to be overshadowed by comments regarding possible strategic alternatives."

TW's fourth-quarter results likely will show strong film and cable systems figures, with "I Am Legend" a key film unit booster, offset by continued challenges at AOL, analysts said.

Chung eyes unchanged quarterly revenue at about $12.4 billion and operating cash flow of $3.5 billion, which would mark a 9% improvement.

Corporate siblings Viacom and CBS Corp. will end the conglomerate earnings season in late February, and analysts recently have trimmed some of their expectations for the two a bit. Both stocks also have seen some recession fear damage, with many on the Street calling CBS particularly exposed because of its strong reliance on ad revenue.

"CBS Corp. has the least diversification and most correlation to the cyclicality of the economy-driven advertising environment, but we believe most of the recession and strike-related fears should be priced into the stock by now," Miller Tabak + Co. analyst David Joyce said.

The economy also will hit Viacom in due time, he expects. "Due to a weakening economy, we are expecting a bit of a pullback now on DVD sales," Joyce said.