UBS Analyst Downgrades Entertainment Sector Rating to 'Neutral'

John Janedis cites the industry's return to "normalized advertising growth" as a key factor even though cable network groups are close to wrapping up strong upfront ad deals.

NEW YORK - UBS analyst John Janedis on Thursday downgraded his entertainment sector rating to "neutral" with "reasonable valuations and cash returns" partially making up for what he said will be a return to "normalized advertising growth."

His latest report came as sources said that the cable upfront advertising sales process is in the home stretch, and Time Warner's cable channel group and Viacom's MTV Networks have been reaping strong price and dollar increases over last year.

Overall, big cable network units will bring in strong upfront gains, which are expected to help the total cable upfront haul roughly match the broadcast upfront for the first time.

But Janedis on Thursday cut his ratings on the stocks of Time Warner and Discovery Communications - from "buy" to "neutral" - and lowered his financial estimates for CBS Corp., Viacom, Walt Disney and Scripps Networks Interactive "after several quarters of above trend growth for the sector." He maintained "buy" ratings on CBS and Viacom.

"The combination of a modestly slowing ad market, tough comparisons, the reality that the ad market is cyclical and the potential for elevated programming costs to maintain audience are the drivers behind our downgrades and estimate reductions," said Janedis.

While this year’s upfront has been "modestly ahead of our expectations," Janedis argued that "the historical relationship between calendarized growth in upfront cost per thousand increases and network ad growth is less than most would expect." And he predicted upfront cancellations in the coming quarters.

He cautioned that "a slowing third-quarter scatter market, less pricing power and the potential for scatter over scatter to be down by the fourth quarter or first quarter 2012 are causes for concern, and in our view, will translate to downward estimate revisions relative to [Wall Street] consensus."

Meanwhile, according to sources, big cable network groups like TW's and Viacom's are close to wrapping up their upfront deals. The overall cable upfront is expected to be mostly or completely wrapped up before July 4.

"It's probably the biggest sellers market since 2003," said Brad Adgate, senior vp, research at Horizon Media. "Some top tier networks get  double-digit percentage gains in [ad rates]."

The MTV Networks portfolio of channels has seen growth comparable to the broadcast networks in both upfront volume and price, according to a source. On average, the group is up in the low double digits in both price and volume.

At TW, the three big Turner entertainment networks - TBS, TNT and truTV - are virtually done with the upfront and have seen double digit ad rate increases in the 12 percent to 13 percent range, a source said. Adult Swim is about three-quarters done also with
double digit rate gains.

While those assets are nearly done with their upfront deals,  TW's CNN started its upfront deals in earnest only last week and is about 40 percent to 50 percent done with solid rate increases. The election year next year has helped the news channel.

"In aggregate, we think cable dollars will be up in the mid teens to $9.2 billion compared to our 15 percent estimate, with many of the networks selling 20 percent more of their inventory compared to the 2010/11 upfront," Janedis predicted. "While this strategy locks in low
double digit ad growth for the 55-60 percent-plus of volume sold, it also creates a modest negative mix shift for the 2011/12 season given the strength in scatter throughout the 2010/11 season."


Twitter: @georgszalai