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MBPT Spotlight: Predictable Plots No Problem For Media Stocks on Wall Street—Analysts warn managements not to ‘screw up’ gravy train | @jlafayette

One reason why the big media companies have become so popular on
Wall Street is the predictability of their earnings. So analysts expect few surprises
during the quarterly earnings reports that will come out over the next two weeks.

“What’s remarkable is how unremarkable
we’re expecting it to be,”
says David Bank, managing director at
RBC Capital Markets.

The media industry has been riding
a wave of steadily increasing revenue
from cable affiliate fees, broadcast retransmission
consent payments and reverse compensation from
television stations, and digital subscription videoon-
demand payments, most of which are locked up
in long-term contracts. “That’s what I think portfolio
managers want. They want a combination
of growth and very credible
visibility in that growth,” Bank says.
“If you don’t screw it up, it’s a pretty
good business.”

Bank adds that there’s no obvious
storm clouds on the horizon, which
means that for now, analysts and investors
will be focusing on the longer
term. “You’re going to be somewhat
reactive to the quarter, but I need to
know what the next four years of layering
in retrans is going to look like.
When are we going to really start
seeing acceleration of reverse comp?
What are those relationships on the
broadcast side going to look like? How are the networks
and the local station groups going to split the
money?” Bank asks.

One thing that could change the industry’s dynamics
would be a round of M&A in which companies
that have been buying back their
own shares decide that maybe they
ought to be buying someone else’s.

Less About the Ads

Not so long ago, analysts would be
anxious to hear about ad sales trends. But now,
“the advertising component has become less important
to the sector,” says Michael Nathanson,
senior analyst at MoffettNathanson Research. The
television business is all about national advertising,
and national advertising is growing at about
the same rate as domestic gross national product,
Nathanson says.

But Nathanson adds that as the quarterly earnings
roll out, some might forget that the comparisons
to last year include the 2012 Summer Olympic
Games, which for two weeks drove viewers and ad
dollars to NBC.

“I’m expecting people to speak of third-quarter
trends in a pretty positive light,” Nathanson says.

Last year also featured a heated election season,
which pushed some national ad dollars away and
led to three or four nights of commercial-free hours
for debates in the fourth quarter. “I have a feeling
that just because of the lapping of the election
you’re going to hear people talking positively about
the tone of the ad market,” Nathanson says.

For the short term, Nathanson doesn’t see too
much negativity about the industry. With a handful
of new programs, such as Fox’s Sleepy Hollow and
NBC’s The Blacklist, opening the season strong,
media companies will have a positive spin to put on
their broadcast networks.

While media companies are doing fine, offering
investors looking at a low-GDP growth world reliable
and stable 5% to 6% growth, Nathanson’s concern
is the health of the ecosystem. “We’re going to
pay a lot of attention to the net addition of pay-TV
homes to see if it’s gotten better, or if it stays the
same,” he says.

Bank calls CBS his “top pick” in the sector. For
CBS, it’s about the retrans story playing out over
the next three to five years, he says. Bank also
thinks that it will be interesting to see
what Viacom has to say, now that its
ratings are headed upward. Bank ranks
Viacom shares as “outperform.”

Analyst Michael Senno of Credit Suisse
rates 21st Century Fox as outperform despite
investor concerns about ad revenue
and ratings at the Fox broadcast network.
The upside at Fox is sports, which will account
for more than 50% of broadcast
ad revenue in fiscal year 2014 (Fox’s fiscal
year started in July). Senno also notes
that ratings at the new cable channel Fox
Sports 1 were up 74% in the third calendar
quarter and are up more than 100%
so far this quarter.

Nathanson also sees big things for AMC, whose
commercial ratings were up 40% in the third quarter.
He expects the company to report a 30% gain in ad
revenue, thanks in part to the last episodes of Breaking
. “AMC is going to stand out,” he says.