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March 19, 2008
Big Media Fundamentals Holding Up For Now
Catching up some email, I found a couple of interesting pieces on the major media companies from Merrill Lynch analyst and my friend, Jessica Reif Cohen. Back in early March, Jessica noted that as a group the media companies she follows reported 4Q07 earnings ahead of her estimates. Her universe had revenue growth of 15% and EBITDA growth of 12%, ahead of her estimate for 10% and 6%. Jessica's estimates weren't far off consensus. Among major companies, Disney and News Corporation easily beat estimates as did Dreamworks Animation. Viacom reported at the high end and Time Warner reported inline. CBS results showed no growth but were close to consensus as well.
In this initial report, Jessica noted that she thought 1Q08 results would be similarly strong but she was worried that this was a "head fake" as media company results tend to lag the economy by a few quarters, especially when the economy has slowed significantly.
I own DIS and NWS on behalf of Northlake clients and even as the I reported favorably on the 4Q results and higher guidance from both companies I was worried that results could slow quickly if not unexpectedly. The fact that DIS and NWS have reported a string of positive surprises but seen their absolute and relative valuations sink to historic lows strongly suggests the market has a similar worry.
With this in mind, I have been on the lookout for any evidence that fundamentals were slowing for the major media companies. Mostly, that means that TV advertising slows. DIS has the added issue of slower sending on vacation travel....
....Jessica's report of March 14th had the first commentary that suggested TV advertising might be slowing. She mentioned that News Corp said that Fox TV stations are running about 5% under budget and that CBS mentioned slower advertising growth in some smaller markets. Both companies mentioned strength elsewhere that would at least offset the weaker TV ad trends but this is definitely something to watch.
The bottom line is that if TV ad trends (and travel trends for DIS) do not slow markedly over the next quarter or two the shares of the major entertainment companies are deeply undervalued. Another question is whether current prices reflect enough of a slowdown to insulate stock prices against lower estimates. I am not sure how this plays out but I think in the case of NWS and DIS downside is about 10% while upside is 20%. That is a risk-reward tradeoff that encourages me to maintain my positions in both stocks.
Posted by Steve Birenberg at March 19, 2008 09:35 AM in Media
FROM WHAT I CAN TELL,CETV AND MICC ARE STILL HAVING EXCELLENT EARNINGS ETC. AND WILL HAVE GREAT CONFERENCE CALLS IN MAY.HOWEVER, I AM MORE CONCERNED ABOUT THE MACRO PICTURE AND THAT THE ECONOMIES WILL NOT TURN UP FOR GOOD UNTIL WELL INTO 2009.TO THAT TIME,THE EMERGING MARKET MAY HAVE ONLY SHORT BEAR MARKET RALLIES.THIS PAST RALLY WAS VERY DISAPPOINTING AND TURNED BACK AT THE FIBRONACCI MARK OF ONLY 38%.ARE YOU STILL MORE OPTIMISTIC IN THIS REGARD?IF THE US MARKET REMAINS DOWN,CAN THE MEDIA STOCKS OUTSIDE THE US
DO WELL?
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I remain convinced we are in a trading range based on news flow. The news flow has turned negative again so we are headed to the bottom half of the trading range. Media stocks are tricky now because ad trends lag the economy. As a result they are strong now but no one will pay for that given a likely slowdown.
Emerging markets will also be difficult even as their fundamentals are far better than the US. Investor willingness to take risk is what drives emerging market stocks in the short run and for now investors are unwilling to increase their risk level. Thus despite good news stocks like CETV and MICC are unlikely to go up much until the market goes up.
CETV is up today because Cramer spoke extensively and very positively about it on his show on Friday.
Posted by: Steve at April 14, 2008 09:21 AM