The annual upfront television advertising market moved close to conclusion last week for the broadcast television networks. ABC, CBS, and FOX all announced their sales. Only NBC, which is in the weakest position due to a 15% decline in ratings last TV season, has yet to wrap up its sales. The upfront market is when the networks sell commitments for the upcoming fall season. Commitments passed the fourth fiscal quarter can be cancelled subject to certain limitations so the upfront is not a firm indicator of the future advertising. However, it does give a sense of the ad market and can be important to individual networks and their parent companies.
I have written bullishly on Disney (DIS) and among the key catalysts was the likelihood that ABC would experience a strong upfront market for its ABC network. The results for ABC announced last week did not disappoint….

….ABC sold $2.1 billion of advertising, up 30% against a year ago, and much higher than expectations of a 20% increase. Upfront sales equal the cost per thousand viewers (CPM) times the guaranteed ratings times the percentage of inventory sold. ABC sold about 80% of its advertising at CPMs up 4%-6%. In the 2004 upfront, ABC sold a similar amount advertising. Therefore, with CPMs up 4%-6%, the math concludes that the ratings guarantee is up 22%. This seems unusually high but remember that ABC ratings were up 16% in the just-concluded season, so ABC is really providing a guarantee that ratings will rise another 6% in the upcoming season. Given the company’s ratings momentum, the success of mid-season replacement Grey’s Anatomy, and the new fall schedule, analysts and industry observers seem quite comfortable with the ABC ratings guarantee.
For ABC and DIS, these upfront results are good news. According to management, ABC will operate slightly above breakeven in the fiscal year ending this September. Assuming upfront sales hold and the remaining 20% of advertising can be sold at least in line with upfront levels, ABC should see a several hundred million dollar increase in operating profits in the fiscal year ending September 2006. DIS will also benefit from increased ABC ratings thanks to a spillover effect on its owned and operated TV stations.
Additional catalysts for DIS shares include improved theme park visits driven by the 50th anniversary celebration at Disneyland and trips booked by foreigners prior to the recent strength in the dollar. DIS will also benefit from a strong movie lineup in FY06, rising theme park margins, and what looks to be a highly successful launch of Hong Kong Disneyland in September. Northlake remains long DIS and believes it stands out clearly among large-cap media stocks.