Despite a decelerating economy and an increasingly gloomy macro outlook, media stocks have remained reassuringly buoyant, ticking upwards as other big-cap offerings sputter and sink. Year to date, media stocks have handily outperformed the S&P 500; among the strongest listings are TV-heavy hitters like Disney (up 28 percent in share price versus the index’s 8 percent gain); News Corp. (up 23 percent); and CBS Corp. (up 19 percent).
Given the volatility of the economy, it appears unlikely that media will continue to whiz along in its contrary orbit. On the eve of second-quarter earnings, some analysts are beginning to take a dim view of the TV market, warning that a slowdown in advertising and depressed consumer spending could herald a rude awakening for investors. “In order to fuel the rally further, earnings numbers need to start moving up,” said Nomura Equity Research analyst Michael Nathanson. “Yet we do not see the scope for positive earnings revisions for the Q2 reporting season.” Nathanson added that he believed earnings would reflect a significant slowdown in the broadcast ad business, with network sales likely to fall 2 percent year over year, versus a 5 percent gain in Q1 2012.
In keeping with the forecast, Nathanson revised CBS’ price target down from $35 to $34 a share, while leaving Disney unchanged at $51. News Corp. was bumped up one dollar to $24.
RBC Capital Markets analyst David Bank offered a more moderate interpretation, noting that investors should rest easy given the consistency in the ad market. “The upfront was softer than expected, but that shouldn’t make a material impact on total budget growth for 2012-13,” he said. “Television is the most resilient medium on the planet. All you need is for the ad market to be relatively stable, and you can still see massive growth coming from retrans, affiliate fees and licensing.”
All told, CBS in 2013 will command around $830 million in retrans consent/reverse compensation, over-the-top licensing and syndication deals, or roughly 20 percent of the $4.2 billion the broadcaster is expected to book in ad sales revenue. In the near term, Bank has maintained his $40 price target for CBS. (News Corp.’s target also went unchanged at $26, while Disney was bumped up $2 to $52.)
Bank’s forecast for the remainder of the year calls for a continuation of the tepid scatter market that has prevailed for the last nine months. “We expect scatter premiums to remain in the mid-single digits for the next year or so,” Bank said, adding that 2012-13 broadcast budgets are on track to inch up 1.3 percent to $13.8 billion.
One ad sales chief disagreed, saying scatter has already picked up versus the second quarter. In any event, there certainly will be more scatter inventory to play with when the new season begins, as the networks left more money on the upfront table, booking 77 percent of their available inventory versus 80 percent in the previous bazaar.
In what is perhaps the most optimistic outlook, Barclays Capital analyst Anthony DiClemente said another major rebound could be in the cards. Two years ago, fears of a double-dip recession and European insolvency put the squeeze on upfront demand. But when the storm clouds broke, “scatter premiums were as high as 25-40 percent above upfront levels,” he said. “If the macro improves, we could see a page from the 2010 playbook.”