Wall Street Discusses Weaker Fourth-Quarter Cable Networks Ratings

ESPN College GameDay Screen Capture - Lee Corso - H 2011

Walt Disney, Time Warner and Viacom were impacted by "unusually weak" cable viewership in the period, says Nomura analyst Michael Nathanson.

NEW YORK - With cable networks being the entertainment conglomerates' biggest profit driver, several Wall Street analysts on Tuesday highlighted weak fourth-quarter cable viewership and discussed what it means for Hollywood companies.
Nomura analyst Michael Nathanson in a report Tuesday reviewed fourth-quarter live and C3 ratings, pointing out that they "produced some pretty surprising results." He added that Disney, Time Warner and Viacom "were impacted [to varying degrees] by unusually weak cable ratings."

In terms of live viewing, broadcast ratings were down 3 percent, but cable networks ratings fell 5 percent in the final quarter of 2011, Nathanson said. "Thanks to either the continued impact of the DVR, shifts in the Nielsen sample, the NBA strike or slight changes in consumption patterns, live primetime TV viewership declined," he suggested.

Looking at live-plus three days viewing, a figure that advertisers focus on, broadcast viewing was up slightly thanks to a DVR lift, while cable was down 1.1 percent.

Nathanson's concern: the trend could create downward cable network earnings revisions. He increased his target price on the stock of Walt Disney by $1 to $44, but cut his Viacom target by $1 to $53, his target on Discovery Communications by $1 to $46 and his target on Scripps Networks Interactive by $2 to $45. He left his target prices for the stocks of CBS Corp. ($28), News Corp. ($21) and Time Warner ($39) unchanged.  

Nathanson's conclusion: "As an asset class, we favor conglomerates that, we believe, will be able to drive higher than average affiliate fee growth over a footprint of broadcast and cable networks while enjoying the broadcast ratings’ current benefit from DVR lift."

With the exception of CBS Corp., the cable networks units are by far the largest driver of operating income at entertainment conglomerates.

Morgan Stanley analyst Benjamin Swinburne in a look at likely 2012 media industry trends also mentioned the cable ratings challenges. "With more to gain (higher affiliate fees, digital and international licensing) and to lose (cable ratings now declining, distributors forced to choose what to carry and what to drop), investment levels in programming will likely increase, pressuring incremental margins for many cable networks," he predicted.

And Barclays Capital analyst Anthony DiClemente downgraded his rating on Disney's stock to "equal weight," similar to a "neutral," citing the stock's recent run-up and a lack of catalysts. Among other factors, he said that ESPN ratings ended the final quarter of 2011 down 15 percent. "We believe this ratings weakness, tough comps in the first half of 2012 and moderated demand in the scatter market could pressure ad revenues," DiClemente said.

Davenport & Co. analyst Michael Morris, however, came out in support of Viacom, which has been in the Wall Street spotlight amid recent ratings declines at kids TV network Nickelodeon.
He said investors focus on ratings weakness and its advertising impact are "likely to dominate near-term sentiment."

Softer ratings at Nickelodeon alone likely dragged down U.S. ad revenue by around 5 percent in the final quarter of 2011, he predicted. But he also emphasized that long-term ad performance at Viacom has been more consistent than the stock implies. "Ad revenue at Viacom has been more stable over the past five years than we believe most investors realize, with a 3 percent compound annual growth rate," he said.

Leaving his $55 price target on Viacom shares unchanged, he told investors: "we would buy as expectations are low."

Email: Georg.Szalai@thr.com

Twitter: @georgszalai