Disney’s March Quarter Shaping Up Well

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As mentioned in my overview of the 2007 Prudential Midwest Media Day, I came away from my meeting with Disney (DIS) with increased confidence in the outlook for March quarter earnings. The March quarter represents 2Q07 for DIS and will be reported after the close on May 8th with a conference beginning at 4:30 EDT.
There are several reasons for increased optimism about the March quarter including (1) strong scatter market pricing at ABC, (2) mid single digit gains in DVD revenue, ( 3) decent performance at the box office from this year’s releases relative to what was expected to be a tough comparison, (4) fewer movie releases this year possibly offset by marketing costs for Meet The Robinsons falling in the March quarter against a June quarter theatrical release, (5) flat overall theme park attendance which is trending above conservative analyst estimates, and (6) ratings strength at ESPN and the Disney Channel and the financial benefit of ABC’s taking over the #1 spot on Thursday’s, the most lucrative night on TV..
The debate over DIS shares continues to revolve around the growth rate in the next 18 months….

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Prudential Midwest Media Day 2007

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I spent Tuesday at Prudential Securities Midwest Media Day. This is a great conference using a unique format combining very small group discussions with one-on-one meetings. Over the course of the day I met with CBS (CBS), Lee Enterprises (LEE), DreamWorks Animation (DWA), EW Scripps (SSP), Omnicom (OMC), Moody’s (MCO), and Disney (DIS). Special thanks to Prudential media analyst Kathy Styponias and my institutional salesperson Michael Callahan for inviting me to the conference. Customer service is a hallmark of both of their efforts.
The only company at the conference that is presently owned broadly in Northlake client accounts is Disney (DIS). Nevertheless, I am positn gthis summary here instead of at Media Talk because broader conclusions about the media environment that impact actual Northlake holdings couldbe drawn.
I did not come away the conference with any new buy or sell ideas. However, I am incrementally more positive on CBS and SSP. I have been bearish on both stocks and don’t feel they are buys but I learned new information that challenges my core long-term bearish thesis on each stock.
On DIS, which I have been long on behalf of Northlake clients for a couple of years, I gained increased confidence in the upcoming March quarter earnings report. DIS is not included in this report but look for a separate note in the next couple of days.
Read on for individual company comments….

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More Media Madness

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The market had its best week since 2003. The weekend is 75 degrees and sunny in Chicago. Same forecast for today. All the windows are open creating the perfect sleeping weather we all covet. Is all this good news a sign I should make a new buy today? Or does all this good news mean a top is at hand and it is time to sell?
Here is your Monday morning Media Madness:
• Tribune (TRB) is reportedly leaning toward accepting a two-step takeover from Sam Zell that will ultimately pay shareholders about $33 per share in cash. Eli Broad and Ron Burkle, who made a similar bid aren’t happy and are asking for the Board for details. This scenario could squeeze another dollar or so for TRB shareholders. There isn’t much more value in TRB but the latest news suggests the stock has minimal downside, a change from last week when the possibility that no deal would exist had the stock headed for a long period in the mid $20s.
• Regal Entertainment (RGC) should trade ex-dividend for the $2 special dividend being paid with the proceeds of the National Cinemedia (NCMI) IPO. The current yield on the adjusted price is 6.1%. I think that is too high given current interest rates and strong box office results so far this year and coming up in 2Q. I believe the stock will rebound over $20 easily in the near-term…..

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National Cinemedia: Initial Research Observations

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The underwriters of the National Cinemedia (NCMI) IPO launched coverage this week. NCMI is the largest company in the rapidly growing cinema advertising industry and is 22% owned by Regal Entertainment (RGC). RGC is widely held throughout the Northlake client base.
In general, analysts are looking for modest additional upside in this well received IPO. The story is that cinema advertising has lots of room to grow because inventory sellouts can rise and CPMs are too low. Furthermore, an argument can be made that cinema advertising has room to take share of the advertising pie. In the UK this medium represents 1.4% of all advertising expenditures vs. just 0.2% in the US. Given studies showing that cinema advertising has very high recall rates and the fact that younger consumers make up the largest groups of ticket buyers, it seems plausible that cinema advertising will be one of the fastest growth areas of ad budgets.
NCMI further benefits as it gains access to more theatres….

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Sub Prime Meltdown Advertising Impact

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In yesterday’s Media Madness post on the Northlake Capital Management home page, I mentioned that Reuters stated that 40% of sub prime loans had been made to Hispanics. This had me wondering whether sub prime lenders were substantial advertisers on Hispanic radio and TV stations and networks. I don’t watch or listen to Hispanic media so I have no idea but I’ve got to think the loss of sub prime lender advertising could be a significant headwind.
In a similar vein, I received a piece of research from Merrill Lynch discussing the potential impact of the sub prime meltdown on internet advertising…..

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Media Madness

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A few small items in the media world that are cluttering up my desk:
• Last week FCC Chairman Kevin Martin appeared before Congress for the first time since the Democrats took control. The questioning made it very clear that the FCC will face much different Congressional oversight until at least January 2009. Fortunately, the agenda for media companies is not that heavy but pending and rumored mergers are likely to find a much tougher road to approval.
• Martin’s testimony revealed that the FCC will consider reestablishing the 30% ownership cap for any multichannel service provider, cable or satellite. This should not create much of an obstacle to further industry consolidation. Presently, a DirecTV-Echostar merger would just barely slide in under the proposed cap. Additionally, either Time Warner Cable (TWC) or Comcast (CMCSA/K) could acquire Cablevision (CVC).
• According to a Reuters article, 40% of all sub prime loans were made to Hispanics. There are already some signs that Hispanic advertising growth is slowing from its historical rate. I wonder how much Hispanic radio and TV advertising was from sub prime lenders. I also wonder if the sub prime meltdown could cause damage specifically to the Hispanic economy that could impact general advertising trends to the important population. Negative implications might exist for Spanish Broadcasting (SBSA) and Entravision (EVC)…..

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Upside From Comcast’s Internet Advertising Business

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In what should be good news for Comcast (CMCSA/K), the Wall Street Journal reported in its Weekend Edition that Comcast is unhappy with its current relationship with Google (GOOG). Under an agreement that expires at year end, Google provides search for Comcast.net. According to the Journal, Comcast is actively shopping its internet search relationship with the possibility that Microsoft (MSFT) or Yahoo (YHOO) could displace Google. The Journal also indicates Comcast is looking to sell 80% of its display advertising inventory to Microsoft, Yahoo, or the AOL division of Time Warner (TWX).
Given the battle for search and display inventory Comcast stands to see a big boost in its annual take from these sources. According in the Journal, in search alone, Comcast is currently receiving about $70 million per year from Google. Comcast believes that they should be receiving at least $100 million. Comcast.net is the 17th most trafficked site on the net and provides around 7-8% of all of Google’s searches…..

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Apple Acting Well

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Apple (AAPL) held up well during the market pullback and now is leading to the upside, trading at its highest price since the breakdown following the December quarter earnings report in mid-January. I’ve written endlessly on Apple, as you can see if you click the AAPL link immediately below, so for another perspective here is a link to a well-written and well-reasoned bullish article that appeared on theStreet.com:
Jon Markman’s Article on Apple

Internet Continues To Take Advertising Share

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The Wall Street Journal had an article reviewing the latest data from TNS Media Intelligence, a firm that tracks media spending patterns. TNS recently reported that spending on “measured media” among the top 50 advertisers fell by 1.5% in 2006 despite the fact that overall ad spending rose by 4.1%. The difference in the two figures represents internet advertising. I have highlighted in the past similar stats regarding specific ad categories or specific advertisers. This article notes some the same ideas. For example, Procter and Gamble is cutting TV advertising in favor paid search and other internet advertising. Johnson and Johnson (JNJ) sat out the upfront last year and according to TNS cut its national TV budget by 25% or $250 million. At the industry level, auto advertising continues to shift to the web aggressively. This is not too surprising given studies that show a very high percentage of auto buyers have searched the internet prior to heading to the dealer….

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Some Data Challenging the “Box Office is Dead” Hype

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Not to beat a dead horse but I wanted to follow-up on my post yesterday where I stated yet again that the hype that the domestic box office is dead or dying is off base.
Here is a link to the annual domestic box office performance since 1980 courtesy of BoxOfficeMojo.com. Several things jump out when you look at the data. First, a slowdown in growth beginning in 2003 is evident in both total box office and tickets sold. Second, 2005 was a really bad year. I am going to ignore the data that shows the cost to produce a film has risen much more rapidly than the domestic box office revenue. I’ll address that in another post focusing on studios as opposed to theatres.
These highlights suggest that some of the bearish hype over the box office is warranted. However, I think several other factors are worth noting. Most importantly, the last few years aren’t the first time the box office has slumped. 1985/86, 1990/91, and 1999/2000 each were back to back years where ticket sales fell. Growth picked up following each of those downturns….

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