Time Warner, CBS prepare to report Q3 amid shifting media landscape

Time Warner
Time Warner Inc. headquarters. Image: Time Warner

Starting tomorrow with Discovery Communications and continuing throughout the week with CBS, Time Warner and 21st Century Fox, media earnings season is set to kick off.

MoffettNathanson analyst Michael Nathanson sees reasons why investors should be both encouraged and skeptical of media companies ahead of third-quarter earnings.

“…We estimate that a DirecTV Now type product at $35/month could capture a market of 10 million subscribers over time with over 2 million incremental pay TV universe subscribers. If indeed this is the case, these sub-$40 services have the ability to change the slope of pay TV subscriber losses and perhaps improve the negative sentiment that has enveloped the media industry,” wrote Nathanson.

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But, Nathanson warned, the “downward pressure on video bundle pricing could squeeze the profitability from the traditional MVPD distributor model which would, in the long run, hurt the entire industry. Initially, we envision the pure-play cable network industry will feel the pain as distributors favor must-have live sports, news and event content over long-tail programmers.”

With that in mind, Nathanson looked ahead to Time Warner’s earning call Wednesday -- which will likely be overcome with discussion of AT&T’s $85 acquisition bid -- and anticipated Time Warner would have a decent report. He raised the adjusted EPS by 6 cents to reflect better-than-expected profit growth for HBO and Warner Bros. while leaving Turner estimates as is.

UBS analyst Doug Mitchelson put his Time Warner EPS estimate at the same $1.40 mark, ahead of Street estimates, but signaled some wariness due to the uncertainty regarding a potential FCC review of the AT&T deal.

“Concerns center more around the potential for an FCC public interest review than the outcome of a DoJ review, especially with it not even clear who will be the FCC Chairman in 2H17. Therefore, we expect an unusual level of ongoing focus around Time Warner's operating momentum as investors gauge the upside/downside for shares under an ex-AT&T scenario,” wrote Mitchelson.

Also reporting on Wednesday this week is Fox, which is due to announce its fiscal first quarter results. Nathanson slightly raised his EPS estimate for Fox but said the estimates reflect “weaker ad trends at the Broadcast segment.”

Mitchelson, meanwhile, said UBS is keeping its EBITDA estimate for Fox at $1.78 billion, ahead of Street estimates of $1.73 billion.

UBS sees “meaningful upside to Fox shares” partially due to Fox demonstrating its leverage over distributors in upcoming renewals with the top-2 cable operators; Fox being included in every virtual MVPD, including its RSNs included on terms comparable to its traditional deals; and Fox’s benefits from strong broadcast scatter market pricing, especially with its NFL ratings only down 4 percent.

Following Time Warner and Fox, CBS is also due to announce earning this week. Nathanson is maintaining his view on CBS for the quarter, restating that unchanged revenues and slightly lower costs will lead to earnings growth of 2 percent.

“Our model incorporates CBS’s recent disclosure around separating the Radio and TV Stations segments as well as an accounting change in regard to how the company reports retransmission revenues,” wrote Nathanson. “100 percent of retrans is now included in the local stations with the portion paid to the Network booked as a cost within the local segment. The result is higher revenues but greater eliminations with no change to EBITDA.”

Mitchelson said that CBS’s EPS will come in around $0.98, and he said he wouldn’t be surprised if 2017 estimates went up due to strong entertainment ratings for the network.

“With respect to CBS operations, bulls expect strong/consistent retrans revenue growth, little impact from pay TV secular headwinds, sustained SVOD revenue, continued TV syndication growth (particularly internationally), consistent CBS broadcast ratings leadership, favorable long-term prospects for CBS's OTT services, value in owning the #2 premium pay cable network, and spectrum auction/Radio IPO proceeds driving continued share buybacks,” wrote Mitchelson.

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