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Good 3rd Quarter for the Media Biz: Jack Myers Weekly Wall Street Report 10-21

October 21, 2011
Business Fortune Cookie

Published: October 21, 2011 at 03:27 PM GMT
Last Updated: July 31, 2013 at 03:27 PM GMT

While analysts have been nervously watching for signs of growing economic uncertainty since around June, this week's quarterly report is a qualified sigh of relief. Analysts were relatively pleased with the numbers, and are hoping for an even livelier holiday quarter which is already underway.

Here's how it went in media:

KPCB partner Mary Meeker gave her annual presentation on Internet Trends at the Web 2.0 Summit in San Francisco this week, highlighting several factors, such as the surge in numbers of Internet users outside the U.S., mobile empowerment, and eCommerce. Her presentation can be watched here, and the slides are available here. The biggest quarterly release of the week came from Apple (AAPL), which was actually faulted as having a rare miss in revenue estimates while also having the best quarter for iPad sales ever. The stock came tumbling down slightly after it was reported that Apple sold fewer models of the new iPhone 4S than expected. However, since the iPhone's launch date was not during the usual summer season, there's good reason to believe that the softer-than-usual sales were just a hiccup rather than a trend.

But even that line of reasoning was not satisfactory for small brokerage firm BGC, which actually downgraded the company from Buy to Hold. Analyst Colin Gillis wrote in his note that Apple has to "constantly set records just to meet expectations," which seems rather unsustainable in the long term. While Gillis thinks Apple's fundamentals are strong, he'd rather bid his time and wait for a small change in investor perspective to knock the price down just under $400.

Analysts across the board were relatively pleased with Yahoo's (YHOO) results this week, even though concerns regarding display ad revenue remain. Net display revenue came in at a flat year-over-year growth of $449 million, which was below guidance and Barclays Capital (BCS) analyst Anthony DiClemente's estimate of +5% y/y. However, improved cost controls led to operating income of $177 million, beating DiClemente's estimate of $155 million. Barclays maintains an Equal Weight rating and $19 price target. Doug Anmuth from J.P. Morgan (JPM) thinks that investors will be willing to forgive Yahoo's less than perfect revenue growth if the focus remains on a deal (.pdf), which he believes it does. Anmuth maintains Yahoo's Neutral rating and $17 price target.

Cutting the Cord

One of the hot topics during the summer, the cord cutting debate might yet make a comeback if cable, satellite, and telecom companies' quarterly releases don't go as well as expected. According to a Hollywood Reporter roundup of media analysts, a clear consensus is still somewhat elusive on whether pay TV will win or lose in this upcoming quarter.

Credit Suisse's (CS) Spencer Wang, who in 2010 led the pack into the cord cutting debate, said on Wednesday that he remains "concerned on a secular basis about the risk of cord-cutting, given a difficult economic climate for consumers, consistent above-inflation increases in pricing to the consumer, and the growing availability of lower cost over-the-top (Internet-delivered) video services." However, Goldman Sachs' (GS) Jason Armstrong feels that cable trends are better now than versus a year ago, but telecom and satellites are worse off. Armstrong's mixed outlook notwithstanding, he feels that the "sequential rebound, with further improvement expected in the fourth quarter, combined with the woes at Netflix (NFLX) should continue to calm cord cutting fears."

TV ratings also did well this week, as Barclays DiClemente cited AMC's The Walking Dead, which opened its second season with the highest ever rating for a cable drama, and the 31 million NFL viewers who rolled over into prime-time and powered Fox into a "sizable victory in the 18-49 demo." ABC also "held its own" this week as eight of its shows made the prime-time top 25 rankings, even as the network faces some tough competition.

The DVR Difference

Nomura Americas media analyst Michael Nathanson's latest note explores how growing DVR penetration influences consumer behavior and rating standards used by advertisers (.pdf). As the industry enters its fifth season of using the C3 standard (commercial ratings using three days of DVR playback) instead of live viewing, some key differences are cropping up. Cable networks using C3 are posting ratings that are up 2.4%, as opposed to being down 2% when using live viewer data. In the third quarter, A18-49 viewing was up 0.7% when using C3, but that turned into a 3.3% decline if based on live viewing. Nathanson warns investors against making snap judgments based on live rating data alone.

And while Deutsche Bank's (DB) Matt Chesler has reaffirmed short-term advertising data points as mostly reassuring, he notes that brand-owners' decreased spending next year, at least in the first half, is simply inevitable.

Advertising

The imminent downturn that analysts have been talking about for the last few months is, in fact, "creeping up on us," according to Chesler (.pdf). The real issue, however, is whether share prices have already priced in the inevitable drop in ad spending.

In his most recent note, Chesler, "on a precautionary basis," reduced his 2012 estimates to less than 1% organic revenue growth. However, as valuations are not demanding and some share prices have already underperformed, he perceives certain "early buying opportunities" for WPP (WPPGY), Omnicom (OMC), and IPSOS (EPA: IPS).

In looking to see what analysts can say for sure in spite of the downturn, Chesler focuses on four issues. First, the long-term fundamentals for these businesses are strong; second, their cost bases are flexible and can take a hit from decreased revenue; third, the stocks are already underperforming, so the warning of slashed ad budgets isn't anything new; and fourth, Chesler feels his estimates are positioned so that any forecast risk is moved to the upside rather than to the downside.

He has also released notes on Interpublic (IPG), lowering its rating from Buy to Hold (.pdf), and Omnicom (OMC), recommending to buy shares (.pdf) as the company has just come off a strong third quarter and represents "one of the best combinations of revenue growth and margin expansion in a creeping ad market downturn."

And to cap it all off, you can add one more voice to the Occupy Wall Street fray: Lemony Snicket.

Summary
The third quarter that wasn't -- actually is.

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