There’s a little hyperbole in Nomura Securities analyst Michael Nathanson’s observation that the Q2 Big Media earnings season that wrapped up last week was “one of the most unusual periods [for the industry] in recent memory.” But he’s basically on target. Most companies had something worrisome to report — including softer than expected Q2 revenues, and likely weakness in the Q3 ad market. Even so, media stocks are up, in some cases substantially: Over the last 30 days the Dow Jones Media Index is +7.8% while the benchmark Standard & Poor’s 500 is +4.6%. CBS is the stand out, +14.7%. “Strangely enough, the market didn’t seem to care that much about the specifics,” says Bernstein Research’s Todd Juenger. “In general, media stocks are all in favor, each with its own story.”
What accounts for the euphoria? The most common explanation is that Big Media looks like a safe haven in a weak economy, especially in comparison to other sellers of consumer discretionary items (think Coach, Starbucks, or Best Buy). Giants including Disney, Discovery, News Corp, Time Warner, Viacom, and NBCUniversal make most of their profits from cable networks — and that business has a safety net: Channels still have enough muscle to negotiate guaranteed price hikes from pay TV distributors. For example, Disney’s cable channels are seeing “tremendous price growth,” CEO Bob Iger says. News Corp COO Chase Carey says his networks “have continued to achieve or exceed our targets.” And Discovery CEO David Zaslav says his execs will “be pushing hard to make sure that we get fair value” in carriage deals. CBS chief Les Moonves also crowed about the retransmission consent payments flowing to his broadcast stations. He’s “confident there is significant upside” because “each new deal means increased fees.”
Viacom illustrates the importance of these bullish cable network forecasts. Even though it arguably reported the industry’s most disappointing Q2 revenue and earnings results, the stock is up 8.2% since the announcement. That’s due in part to CEO Philippe Dauman’s claim that Viacom won a substantial price hike from its recent battle with DirecTV. “The battle he conducted against DirecTV was spectacular,” Chairman Sumner Redstone says. “Philippe has the same passion to win that I’ve always had.” But DirecTV CEO Michael White says programmers demanding these big increases celebrate Pyrrhic victories. “The customer at the end of the day is the one getting squeezed and bearing the brunt of these exorbitant price increase demands that are just not sustainable,” he says.
All told, CBS’s earnings were most impressive among traditional diversified media, Wells Fargo Securities’ Marci Ryvicker says. She considers Comcast the winner in cable, with DirecTV taking the prize for satellite, and LIN TV the top performer among local broadcasters.
Here are some of the other themes from the Q2 season:
Movies: Expectations were modest for the quarter, during which domestic box office was -1.3% vs the same period last year. Exhibition chains including Regal, Cinemark, and Carmike reported declining admissions — but revenues overall were flat due to the higher consumer outlays for concessions and tickets to blockbusters including The Avengers and Madagascar 3: Europe’s Most Wanted. On the studio side: Disney was the only major that was able to boast without qualification about the quarter with successes in The Avengers and Brave. Time Warner’ Warner Bros studio was the most notable underachiever, burdened by disappointing sales for Rock Of Ages and Dark Shadows. It also warned of tough Q3 comparisons with last year when it had Harry Potter And The Deathly Hallows: Part 2. Viacom’s Paramount struggled with fewer releases vs last year and with one of them being The Dictator. News Corp’s Fox found that Prometheus and The Best Exotic Marigold Hotel were no match for last year’s Rio and X-Men: First Class, as it also had to account for the costs for Abraham Lincoln: Vampire Hunter which was released in late June — meaning most of the revenue will be recorded in the current quarter. And Universal was off as Battleship sunk below the studio’s expectations.
Ad Sales: Q2 was softer than some analysts expected. But moguls warned that they also might not like the results for the current quarter. On the plus side for media companies, auto manufacturers plan to introduce lots of new models this year, and — for better or worse — political groups are stockpiling record amounts of cash to spend on the election. But pharmaceutical companies could pull back as they grapple with the so-called “patent cliff” — patents either have or soon will expire for blockbuster drugs including Lipitor, Plavix, and Seroquel, opening the way for competition from generics. “Scatter demand is a little slow right now and that’s due to money being diverted to the Summer Olympics,” Time Warner CFO John Martin says. Several other companies said much the same thing. Martin adds, though, that “our view, which is optimistic but we think realistic, is that fourth-quarter scatter could be quite strong.”
Pay TV: Yes, some pay TV subscribers are cutting the cord, according to Q2 reports. But it isn’t significant…yet. Cable lost 616,000 subs, DirecTV and Dish Network together lost 62,000, and telco video providers gained 260,000 –a net loss of 418,000 in what’s historically the year’s weakest quarter for pay TV. (It includes college students who disconnect at the end of the school year.) Still, the Q2 decline was better than last year’s Q2 when the industry was -440,000. That improvement “is hardly reason for the industry to break out the bubbly,” Bernstein Research’s Craig Moffett says, “but it’s likely enough to justify a continuation in the Pay TV rally that began early this year.”
Cash Plans: In addition to the guaranteed pay TV fees, investors love Big Media because moguls have sworn not to use their cash for mega-deals, promising instead to return much of their extra capital to shareholders via dividends or by repurchasing shares. And they stayed true to their word in Q2. Disney and Time Warner were the only major players that spent less on share repurchases in Q2 than they did in Q1. As a result, this year “we estimate the media companies will return $16.9 billion of capital to shareholders, well above the previous peak of $14.2 billion in 2007,” says Barclays Equity Research’s Anthony DiClemente. Looked at another way, company outlays to shareholders this year likely will average 8% of their market values, which is “a far cry from what most investors would have imagined only a few years ago,” Nathanson says.