(By Steven Birenberg) This week was a big one for media earnings. Besides Northlake
holdings CBS and Discovery Communications, we heard from Viacom, Time
Warner, Scripps Interactive, and Comcast Against a cautiously
optimistic backdrop, the results came through inline to slightly better
than expected with CBS leading the way again. The outlook for the rst
of the year suggest modest growth in the September quarter, held back by
market share losses to NBC's Olympics telecast, which is a huge ratings
winner. Management teams were very confident across the board on a
pickup in the December quarter as higher pricing on upfront ad sales
kicks in and political spending tightens inventory and firms up spot
pricing. Overall, the national TV ad market has weathered the first
half economic slowdown well. Media stocks have further upside after
above average performance so far this year as investors respond to
higher estimates, increased predictably, and continued aggressive
capital allocation leading to large share buybacks and dividend
increases. In addition, there is no sign that cord cutting is a problem
or that internet video is changing the basic economics of TV. That
could change but for now with near-term business momentum and reduced
secular fears, media stocks have room for higher valuation on stable to
rising 2012 and 2013 earnings estimates.
CBS has been a leader among media stocks since the bottom in the
summer of 2009. The most recent quarter presented some very challenging
comparisons but once again the company came through. Operating margins
again surprised to the upside as the company adds extremely profitable
retransmission, digital rights, and syndication revenue. Revenue trends
were flattish as expected but a big second half pickup is clearly
coming with strength expected to continue into 2013 as long as the
economy holds. CBS has transformed itself into a content driven company
with much less reliance on advertising. The street has been
consistently behind setting up a series of positive surprises. Earnings
estimates may finally be catching up but the stock still trades at a
discount to its cable network peers. Closing the gap can get the stock
to the $40s.
Discovery Communications reported growth toward the top end of the
industry for the June quarter but was a touch more cautious on the
September quarter than some of its peers. Discovery skews female and
faces a somewhat greater challenge for ratings and ad spending from the
Olympics. Ratings at a TLC and Discovery Channel have been a little
soft as well. None of this would be a problem except that Discovery
shares trade one of the highest multiples in the industry. The premium
is well deserved given industry leading margins, historic growth rates,
and international exposure that should drive above average future
growth. A lull in the share gains cold be at hand but if the December
quarter accelerates, as management firmly believes it will, upside
remains. 2013 looks good as well with new affiliate fee opportunities
and dramatically reduced losses at start-up networks, especially OWN.
Disclosure: CBS and Discover Communications are
widely held by clients of Northlake Capital Management, LLC, including
in Steve Birenberg's personal accounts. Steve is sole proprietor of
Northlake, an Illinois-registered investment advisor. Regulatory
filings can be found at www.sec.gov. CBS, Discovery Communications, and
Comcast are net long positions in the Entermedia Funds. Entermedia is
along/short equity hedge fund 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.