Analyst: 'Sell' News and CBS Shares
Pali's Greenfield Says TV Station Business In Free Fall
By Mike Farrell -- Multichannel News, 1/29/2009 12:01:19 PM
Pali Research media analyst Richard Greenfield was characteristically blunt in his assessment of the broadcast industry in two separate notes on Thursday, slapping "sell" ratings on both CBS and News Corp. and painting a gloomy picture for the former's TV station group.
In a research note, Greenfield reduced his fourth-quarter estimates for CBS for the second time in a week, stating: "We believe TV station businesses are in complete free-fall; not just at CBS, but across the entire industry."
Greenfield estimated that TV station revenue could decline 35% to 40% in 2009, with profits down 65% to 70%. Earlier this month the company inked its first retransmission-consent deal with a major cable operator - Time Warner Cable - and other deals are expected to come.
Greenfield, who maintained his $5 price target on the stock, said that it is inevitable that CBS eliminate its quarterly dividend. The company has steadfastly maintained in the past that it will pay its dividend in the fourth quarter - it already has paid for the first three quarters of the year.
In the note, Greenfield wrote that while he had previously expected the broadcaster to cut its dividend in half over the next six months, his outlook has changed.
As the TV station outlook grows more dire, we believe management has no choice but to eliminate the dividend over the coming quarter," Greenfield wrote, adding that the risk of leveraging the company above three times cash flow with earnings in decline and a $1.6 billion debt refinancing in 2010 is to high to ignore.
"We believe the dividend must be eliminated in its entirety," the analyst wrote.
Greenfield's reason for reducing his rating on News Corp. form "buy" to "sell" was more philosophical. Greenfield wrote that while he still believes news chairman Rupert Murdoch is the most visionary executive in the media industry, he has become increasingly frustrated with the company's lack of strategic direction related to its non-cable assets - TV stations, newspapers and book publishing.
In the past, the analyst had said that the so-called "bad assets" (re: newspapers and TV stations) would become such a small part of News Corp.'s operations that they would no longer impact growth. He estimated the two segments would shrink from 34% of operating income in fiscal 2008 to 8% of operating income by fiscal 2010.
"Our fear is that News Corp. is so committed to its existing businesses that it will be willing to sustain businesses that slip into negative profitability for years, (similar to its approach to the NY Post)," Greenfield wrote. "We believe several of its TV stations are or will shortly be ‘in the red,' with book publishing heading for losses, as well as a significant number of its newspapers. In fact, on a reported operating income basis, Dow Jones will generate meaningful losses in its first full-year of News Corp. ownership following its $5.7 billion acquisition."
Both stocks were down about 7% each in early trading Thursday, although it wasn't apparent that the declines were solely because of Greenfield's reports. CBS was trading at $6.05 per share early on Jan. 29, down 46 cents each and News Corp. was priced at $7.65, down 58 cents each.
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