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July 19, 2010

Early 2Q Earnings: Stocks Being Sold But Hopeful Signs for Media

Earnings season is off to a rough start as far as stock prices go. Some stocks gap higher on good numbers but can’t hold the gains (Intel). Some stocks have mixed results and get smacked (GOOG and the big banks). Some stocks miss and get smoked (MAT) and others beat and get sold (HAS).

The broad message from the early reports is that business in 2Q was just fine relative to expectations and guidance so far indicates that fears of a slowing economy have yet to show up in demand beyond weak revenues for banks. Communications datapoints are quite limited and will kick into gear late this week when AT&T reports on Thursday and Verizon reports on Friday. The news so far in media looks good with advertising revenues in 2Q and guidance commentary constructive.

Despite a big sell-off in its stock, Google (GOOG) actually beat on revenues. The issues worrying the street are slowing growth and the heavy investment GOOG is making to sustain growth. Margins are under a little pressure but what really seems to worry investors is that Google's decision to invest suggests a much more competitive and mature search market. For media companies in general, the beat on Google's revenues is a positive. Advertisers are clearly spending on search (up over 20% globally and stronger in the US). Google does not provide guidance but the Q&A on the call did not reveal any worry about near-term demand trends.

Good news on advertising also came from NBC Universal, which reported as part of General Electric's report on Friday. Revenues rose 5%, operating profit gained 13%, and trend in advertising were at the high end of expectations. Cable nets were up high single digits and local TV stations reported ad gains in the mid to the upper 20% range. Given NBCU's broad reach, these ad growth rates speak well to what is to come from other cable and broadcast network companies.

Gannett also provided some good news even though the stock sold off 10% on the report. Gannett reported a 20% increase in 2Q TV station ad revenues and provided a forecast for even stronger growth in 3Q, up in the mid 20% range. Furthermore, according to the Wall Street Journal, Gannett indicated that ad rates are firming and "haven't seen" any pullback in advertising due to recent worries about the economy and financial market volatility.

This week won’t bring much more clarity or information on the advertising outlook. Yahoo reports Tuesday after the close and Street commentary and action in the stock price indicates the results could be decent. The only other media company of note to report is Netflix. The commentary could provide some read-through to DVD trends at the major movie and TV studios and maybe some insight into the re-basing of windows.

The big action for media earnings is the first week in August. I think there is reason to be optimistic about 2Q results and guidance commentary but until we get some better data on the US economy I think it will be hard to make money in the stocks. Expect the stocks to remain volatile, leading the market on up days and lagging on down days. Until we get firm data on the outlook in the second half of 2010 and 2011, the stocks remain hostage to investor sentiment toward the economy.

Disclosure: Google is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. Google and Hasbro are net long positions in the Entermedia Funds. Steve Birenberg is co-portfolio manager of the Entermedia Funds, partial owner of Entermedia's investment management company, and has personal monies invested in the Entermedia Funds.

Posted by Steve Birenberg at July 19, 2010 03:34 PM in Media