Media Stock Handicapping Demands Attention to Ad Sales

For investors in media stocks, the focus this week will be on advertising sales and forecasts for the rest of 2016.

Spending on broadcast TV ads jumped 10% in the first quarter after climbing 13% in the fourth quarter compared with the same periods a year ago, according to Standard Media Index, an industry monitor that works with global ad agencies.

That was very good news for media stocks, helping to drive shares in CBS (CBS) - Get Report , up 19% this year, and Twenty-First Century Fox (FOXA) - Get Report , up 12%. Cable TV networks have had a choppier time, as growth flattened to zero in the first quarter after rising 13% in the fourth, SMI said. 

Yet while advertising for broadcast television has been on a rebound, the question heading into first-quarter earning reports is whether that rebound can continue. It's a question investors will want answered when media executives hold their customary conference calls.

"We remain concerned about the sustainability of recent ad strength given declines in ratings [6% decline in the first quarter compared with the same period a year ago]," Goldman Sachs media analyst Drew Borst said in an investor report. "With ongoing uncertainty in the pay TV ecosystem, we prefer stocks that have must-have content and relatively low ad exposure."

Goldman has buy ratings on Time Warner (TWX) , Fox and AMC Networks (AMCX) - Get Report , largely because they're not as reliant on advertising revenue as other media companies.

Results from CBS on Tuesday are certain to set the bar for the rest of the sector. CEO Leslie Moonves is famously gifted at getting the most out of his programming, and that's unlikely to change in the near future. CBS shares have surged in 2016 as network ad sales have continued to climb after rising 8% in the fourth quarter. CBS has been the best-performing media stock since the beginning of the year.

Looking further into 2016, though, CBS could be vulnerable to slowing ad sales across the industry.

The Olympics on Comcast's (CMCSA) - Get Report NBC in August are likely to hurt CBS more than others, Sanford C. Bernstein media analyst Todd Juenger said, and the company won't be the beneficiary of all those fantasy sports advertisements that cluttered the airwaves before the start of the 2015 NFL season.

CBS also won't have as many Thursday night NFL games on its fall slate, a schedule change that's likely to cut into its total ad revenue. Discovery Communications' (DISCA) - Get Report third-quarter ad sales also could be hurt by the Olympics on NBC. And despite Moonves' early cheering of Donald Trump's talent for bolstering TV ratings, CBS doesn't stand to benefit from increased political spending because it owns few local stations in swing states.

Fox, on the other hand, has been the biggest beneficiary of the early and heightened interest in the presidential campaign. Ratings at Fox News have jumped 60% from a year ago while viewing at the smaller Fox Business News has surged 179%, according to Nielsen data. Fox's advertising numbers are likely to be strong in the first quarter, Juenger added.

Rupert Murdoch's film and television company has been bolstered by the performance of fantasy thriller Deadpool, while it has lost some revenue due to the YES Network blackout on Comcast. 

Shares in AMC Networks, which reports on Thursday, have fallen 12% this year as ratings and ad spending around The Walking Dead continue to decline. A rebound in AMC shares rests on whether Feed the Beast, Preacher or another program can hit it big in the manner of Mad Men or Breaking Bad.

AMC, though, continues to secure increased affiliate fees for content generally viewed as some of the best on television. Goldman's Borst expects a 7% jump in distribution revenue.

Spotting advertising trends is critically important given that affiliate fee growth, the money cable TV providers pay content creators to carry their programming, is largely on a downward trend thanks to the advent of "skinny bundles" and standalone video streaming platforms such as Netflix (NFLX) - Get Report  and Amazon.com's (AMZN) - Get Report Prime service.

Those pressures are only likely to intensify, Morgan Stanley media analyst Benjamin Swinburne argued.

While Comcast last week reported an increase in video subscribers in the first quarter, the telcos and satellite-TV operators are fast losing subscribers. All told, pay-TV operators lost more subscribers--197,000--in the first quarter than in the two previous quarters, Juenger reported, citing data from six of the seven largest cable or satellite-TV providers.

As Netflix and other so-called over-the-top video streaming platforms--Dish Networks' (DISH) - Get Report Sling TV and Time Warner's HBO NOW, to cite two others--win subscribers, affiliate fees increasingly come under pressure. For media companies, it's a game of tug-of-war, with content creators claiming their programming is must-see and pay-TV providers countering that as they lose subscribers, they shouldn't have to pay as much.

"We do not believe 2017 revenue estimates or valuation reflect the risks associated with the full pressure points from an increasingly emboldened, increasingly consolidated and increasingly over-the-top-integrated set of distributors," Swinburne wrote in an investor report published April 27. "Would not be surprised if we see/hear more caution around [affiliate fee revenue] growth outlook here."

Making things more complicated, Hulu is preparing to unveil its own cable TV-style online service early next year featuring programming from the broadcast and cable TV channels of two of its three owners, Walt Disney (DIS) - Get Report and Fox, according to a report from The Wall Street Journal. Hulu's third owner, Comcast, agreed to have limited involvement in the venture as a requisite to regulatory approval for acquiring NBCUniversal.

Advertising revenue sales at Disney's broadcasting division, which includes ABC, is also expected to decline, a fact that Juenger said is "arguably priced into the stock." Of course, Disney is many things to many people, and its film (Zootopia, The Jungle Book), consumer products and theme parks operations continue to perform well. 

Disney reports earnings on May 10.