November 02, 2011
Discovery Leads Solid Media Earnings But Virgin Media Mixed
Given the increased importance of macro issues on the stock market and record high correlations among individual stocks, I am expanding media company earnings analysis this quarter to touch on all companies and major trends, not just Northlake positions.
Several important media companies reported earnings since yesterday's close, kicking off about a dozen reports from the media world this week and next. After the lousy news from Time Warner Cable and Cablevision last week, investors were anxious to learn if a wholesale trend change toward the bears was underway. So far, that is not the case as Discovery Communications (DISCA/DISCK), Comcast (CMCSA/CMCSK), and Time Warner (TWX) affirmed healthy industry trends. DISCK and CMCSK shares are responding well to earnings. TWX is weak but that is due to issues unique to the company (weak ratings at key cable networks). Management commentary on industry trends is constructive.
Comcast met expectations pretty much across the board. This comes as a great relief following back to back misses and poor guidance from TWC and CVC. The only notable weakness in the report was phone subscriber additions. This was a problem area for TWC but Comcast management noted that their promotional push was back to school and stressed video and high speed data. Both those sub numbers looked good.
While Comcast's results come as some relief, investors are likely to remain on edge with cable and satellite stocks. Comcast is a long-term laggard on cable operations. As a result it has low hanging fruit that is allowing it to sustain mid single digit revenue and EBITDA growth and positive subscriber momentum even as the industry is mature and fully penetrated, feeling pressure from lack of household formation (household counts may actually be reversing), and cord cutting fears rise. DirecTV reports tomorrow, which will help to round out video trends in the near-term. Too soon to call the coast is clear but I think Comcast remains the domestic cable company of choice for investors.
DISCK reported a strong quarter boosted above Street expectations by the recent deal with Netflix. Taking away Netflix, results were pretty much right in line with street estimates and guidance. Guidance for 2011 was upped to reflect the Netflix deal. Critically, domestic advertising trends exceeded guidance, coming in up 11%. Furthermore, management guided to mid-teens growth for the fourth quarter and indicated no cancellations so far of first quarter 2012 upfront commitments. Analysts were still skeptical of advertising trends, which will remain the primary issue for the big entertainment companies that own the leading cable and broadcast TV networks. National TV networks is the primary business of most entertainment conglomerates these days.
TWX was generally constructive on advertising trends even though it reported upper single digit ad growth and guided for the same in the fourth quarter. TWX networks are really struggling with ratings which is hurting ad pricing, particularly for scatter or spot buys. DISCK management indicated that scatter pricing was up 5-20% depending on the ratings of its networks. TWX was talking scatter being up just low single digits. I would not read too much on media fundamentals into TWX dropping almost 3% today. The company is clearly lagging its peers in national TV. However, the drop in TWX shares shows that media investors remain generally scared and skeptical and that presents challenges for the rest of the group.
Virgin Media (VMED) reported mixed results. Gross subscriber additions were excellent but churn rose leaving subscribers more or less in line. ARPU or revenue per sub was also good. VMED i still growing but seems to be spending more to sustain growth as operating profits were light of estimates. In addition, management indicated capital spending was headed higher, another sign of the business economics getting tougher. I think that the Street is being too negative on capex as management seems to be spending on success based capital related to the very well received new Tivo interface. There is also the issue of how much the weak UK economy is at fault such that better economic growth later in 2012 or 2013 will fix the "problem." I am willing to give VMED the benefit of the doubt for now as valuation reflects a weak outlook and share repurchases remain very aggressive providing good support for the stock and upside if earnings meet expectations in 4Q11 and early 2012.
We will learning a lot more in the next 24 hours. News Corporation reports after the close today. Scripps Interactive and DirecTV report before the open tomorrow and CBS reports after the close tomorrow.
Disclosure: CBS, VMED, and DISCK are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. CVC, CMCSK, DISCK, CBS, VMED, and DTV are net long positions in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.
Posted by Steve Birenberg at November 2, 2011 02:05 PM in DISCA