US Ads Down, Emerging Markets Up

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I want to make sure everyone saw that Zenith Optimedia reduced its forecast for 2008 US advertising growth. Zenith presents its year ahead forecast each December at the UBS Media and Communications Conference. I attend that conference most years and have always been impressed by the Zenith presentation.
The new forecast calls for a gain of 3.4%, down from its revised forecast of 3.7% in March. Zenith is seeing no slowdown in online ads which suggests that all of the reduction is in traditional media. In fact, excluding online, traditional media advertising is now projected to come in around flat. Zenith noted that auto, real estate, and financial continue to be weak but other typically more resilient categories are beginning to weaken Nevertheless, according to the article in the Wall Street Journal, Zenith is not seeing an abrupt slowdown, rather a spokesman characterized the situation as “a slow leaking balloon.”
In an interesting twist, despite the drop in its forecast for the US, the world’s largest ad market, Zenith actually revised its 2008 global forecast very slightly upward to 6.6% from 6.5%. Strength in developing markets like China and Russia were noted. Also supporting growth is Central and Eastern Europe where Zenith is forecasting 17% growth this year.

Wall-E Drives Cleans Up The Box Office

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A whirlwind weekend had me all over the place so just a brief comment on another great weekend for the box office this morning. But first, major props to Providence, RI where I dropped my daughter off for a summer in the Early College program at Rhode Island School of Design. The city has done a fantastic of development, preserving the incredible wealth of historic buildings and using the river as a focal point for civic activity.
I took my daughter and her older brother to Wall-E for a Friday matinee. The film is every bit as good as the reviews. Hopped on a plane to Providence first thing Saturday morning, back to Chicago by noon on Sunday where I got in my car and drove 8 hours to my place on Lake Superior in Northern Wisconsin. Looking forward to some slower time to start the new quarter. Hopefully some space, peace, and quiet will allow me to do some good thinking about the very difficult market environment.
As expected, Wall-E led the pack with a solid $62 million, meeting expectations. It was the third best opening for a Pixar film and reversed a two film trend of declining opening weekends for Pixar. The film opened slightly better than Cars and with stellar reviews (look for talk of a best picture not best animated picture nomination) and indications it is playing beyond families with younger children I think it could go north of Cars $245 million….

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Dreamworks Estimates Begin To Rise

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Dreamworks Animation (DWA) shares popped yesterday afternoon. I presume it was due to a report from Jessica Reif of Merrill Lynch which I received after the close. Jessica raised her 2Q08 and 2008 EPS estimates from below to above consensus on the basis of the strength in the Kung Fu Panda box office. She noted strength both in North America, where the film has had three full weekends, and international, where it has only opened in a few major markets.
Rising estimates is the first of several catalysts upon which my long position in DWA, established on June 9th, the Monday after Panda opened, is based. Look for more estimate increases next week, especially if Panda can hold its upcoming weekend-to-weekend box office decline to 40% or less against the opening of the extremely well-reviewed new film from Pixar/Disney, Wall-E….

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Finally Some Good News at American Apparel

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APP reached agreement on a new amended credit agreement with its lead bank. Back in early June the stock took a dive on the day the company announced that negotiations were ongoing but that the first deadline had been missed. Not surprisingly the shares are rallying nicely today, up 6.5% right now. Volume is decently above average but not huge.
Beyond clearing this up, a couple of other positives might be inferred. First, the agreement allows for execution of the recently announced stock repurchase announcement. Second, although not a “fact” it is notable that a company without a full-time CFO, in violation of Sarbox, and with admittedly weak finance expertise got the deal done. This might suggest that confidence in the numbers and management team could be a bit higher.
Maybe the tide will turn. More good news might come including (1) June comps, (2) possibly better than expected 2Q results as predicted by the Lazard analyst, (3) the hiring of a full time CFO and/or other senior management, and (4) announcement of progress or even compliance with Sarbox.
Still a risk are the sexual harassment trial against the CEO and founder (although if Dov wins that would be a positive) and a possible restatement of past earnings as a result of a new CFO/achieving Sarbox compliance.
The stock has lots of issues that will keep away most investors and analysts but I think the near-term risk-reward remains favorable and if the good news listed above hits a move back to $10 is very plausible.

Box Office Remains Healthier Than Expected But…

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The box office rose for the fourth consecutive weekend with the top 12 films up 9.7% according to BoxOfficeMojo.com. Every weekend in June has been up bringing the summer to a 2.6% gain. Quarter-to-date the box office is still down 2% due to a very weak April.
Comps stiffen considerably starting this coming weekend but until the middle of July the release schedule should provide enough oomph to keep the box office close to year ago levels. From mid-July onward, it would not surprise me if weekly comparisons fell by double digits as last year had some unusually large hits in what historically has been the weakest part of the summer.
Movie theatre stocks broke to substantial new lows last week with additional losses of 4% or more added on yesterday. Besides putting the best part of the summer season beyond them, the stocks may also have taken a hit on a negative analyst comment regarding Regal Entertainment’s concession sales.
Theatre stocks look cheap and dividend support is getting significant. RGC’s current yield is now 8.25%. Cinemark Holdings, the other quality play, yields 5.50%. To perfect a bullish, contrarian setup, I’d like to see the stocks weaken a little further on weak late July and August box office. At that point the stocks would be at 52-week lows, estimates would have been cut, yield support would be even stronger, and most importantly, the next big season ahead, Christmas, offers the possibility of big gains against a weak performance in 2007.
On the studio front, last weekend offered little new tradable information. The #1 movie was Get Start from Time Warner. The film did fine but will not have a meaningful impact on expected financial performance for the company. The #2 film was Kung Fu Panda. The decline of 35% in its third weekend is a good hold and the film remains on track to gross $220-240 million, ahead of analyst estimates. I think estimates could rise following next week when analysts see how big a hit Panda takes from the new Pixar/Disney film Wall-E. A decline of less than 40% from last weekend’s gross would be good news….

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Media Stocks Still Struggling

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Media stocks continue to act poorly. When I sold Northlake’s positions in Disney and News Corporation on the last trading day in May I was beginning to see more evidence that the deep recession in local advertising media like newspapers and radio was beginning to spread to national advertising such as TV. I had also started to notice the term “media recession” in a lot more news articles and research reports. Admittedly, this is one of those squishy sentiment indicators but I figured if the concept of a media recession that was still debatable was on its way to becoming conventional wisdom it would not be good news for any stocks in the group.
On Monday, in the daily Media and Communications Report from SNL Kagan (a must for any serious media investor), lo and behold, there was a story titled “Media Recession To Hit Some Industries Harder Than Others.” The article recapped a recent piece authored by IDC which stated that advertising expenditures across all media companies will fall by 7% in 2008 even including a material boost from the Olympics and the Presidential election. A 7% decline would represent acceleration from the first quarter which witnessed a low single digit decline across all media driven primarily by an upper single digit drop in newspapers and a mid single digit fall in radio. Network TV remained barely in positive territory but there are more and more indications that the scatter market softened sharply and suddenly during the later half of 2Q.
Given a weakening fundamental and sentiment backdrop, I still see little reason to maintain meaningful exposure to standard media stocks. Northlake continues to own just two pure media stocks, Central European Media Enterprises and Dreamworks Animation….

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Box Office Strength Continues

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The weekend box office was strong again, up 25% vs. a year ago. Another good weekend brings the summer, which begins the first weekend in May in Hollywood, into positive territory, up 2%. A poor April leaves the quarterly comp still down 3% but one more weekend of easy comps will probably allow the quarter to come in flat.
As I have written before, the summer is off to a better than expected start as many movies have found big audiences and there has been only one major disappointment (Speed Racer from Time Warner). Last year May was big thanks to the threequels of the Pirates, Shrek, and Spiderman franchises but those were the only films to do really big business in 2Q07. Analyst estimates for 2Q for the major theatre owners (Regal Entertainment and Cinemark Holdings) call for flat revenues. As a result I do not think that estimate risk for the stocks is material for soon to be reported 2Qs..
This could mean that the theatre stocks are close to bottoming, especially after last week’s sharp drops due to the fallout from the guidance cut by in theatre advertising company National Cinemedia. NCMI fell close more than 20%. The other theatre owners are major shareholders in NCMI. For example, Regal lost about $130 million on its investment in NCMI which cost shareholders over 80 cents per share….

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No Worries As Dreamworks Catches A Downgrade

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An analyst I know well, Michael Morris of UBS, downgraded Dreamworks Animation (DWA) this morning driving the shares down more than 7%. I added a little to some smaller client positions on the weakness. The downgrade is based on Morris’ belief that even after after raising his outlook for Kung Fu Panda the shares are slightly overvalued. Obviously, I disagree. I think Michael’s valuation target and estimates are conservative. Supporting my case is the fact that through Tuesday, Panda is tracking almost exactly equal to Cars which grossed $$244 million in North America. Michael adjusted his DWA model by increasing his gross from $170 to $200 million. The upcoming second weekend will be critical to determining the ultimate North American gross for Panda but I remain very confident it will be comfortably north of $200 million.

Buying Dreamworks Animation

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I purchased Dreamworks Animation (DWA) across client and personal accounts near the open of trading on Monday. The purchase is intended as a “trading buy” which means I am expecting to be out of the position in less than one year. The holding period may be even shorter if the stock attains my target of $35-37.
The catalyst for the purchase of DWA was the much better than expected opening of the company’s latest animated film, Kung Fu Panda. Panda grossed just over $60 million at the North American box office during its opening weekend, exceeding expectations that centered around $45-50 million.
Panda is also expected to do very well internationally, potentially rivaling the success of Disney’s Ratatouille. The film only opened in nine countries on its first weekend but the results were excellent. Panda opened 158% ahead of Ratatouille in Russia and more than tripled the Rat in South Korea. Singapore, Malaysia, and the Philippines each set opening weekend records for an animated film. Larger markets in Europe will see openings later in the summer to avoid competition from the European soccer championship.
Normally, a single film would not be enough to drive the stock price of a movie production company….

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Sluggish Blu-Ray Sales Another Headwind

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So far my sales of Disney has held up pretty well, down just a bit, while News Corp has fallen about 5%. Disney might be getting a boost from some initial reports that ABC is writing upfront business at decent CPM increases, maybe even large enough to offset potentially double digit down ratings guarantees and thus produce a small increase in upfront sales. It is also possible that investors are beginning to anticipate the next Pixar film, Wall-E, due at the end of June and are putting the disappointing North American box office for Prince Caspian in the rear view mirror. Caspian continues to outperform the first Narnia film in overseas markets where it has opened cushioning the downside. More confidence in the economy also helps given Disney’s exposure to advertising AND theme parks. Regardless, I see upside in the shares as limited and downside of 15-20% in the event that the “media recession” spreads to national TV advertising. I don’t like the risk-reward tradeoff so I am on the sidelines.
One thing that I have been hoping would provide a boost to Disney, News Corp, and the other studio owners is the settling of the next generation DVD war in favor of Blu-ray. Given library rebuilds and higher DVD prices, Blu-ray will eventually push DVD growth back into positive territory. However, a recent report by SNL Kagan suggests that thus far Blu-ray players remain slow sellers….

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