Cable Network Outlook: Outperform

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After outperforming the Standard &
Poor’s 500 Index for the second year in a row, cable networks
are headed for a three-peat, Morgan Stanley media
analyst Ben Swinburne said, based on what he sees as a
favorable ad climate and continued affiliate-fee strength.

Swinburne, in a research note last week, said that cable
and satellite stocks in his coverage universe grew their
market capitalization by 9.1% in 2011. Th e S&P 500 Index,
which includes 500 large-cap stocks representing about
75% of U.S. equity market capitalization, was flat for the

Market caps for major cable programmers — CBS, The
Walt Disney Co., Time
Warner Inc., News
Corp., Viacom, Scripps
Networks, Discovery
Madison Square Garden,
AMC Networks
and Liberty Media —
rose 9.1% in 2011. Media
companies — the
networks, plus Dream-
Works Animation, ad
agencies Interpublic
Group, Omnicom
Group, Lamar Advertising
and National
CineMedia; and movie
theater chains Cinemark
and Regal Entertainment — were up 9.5%.

Media as a whole outperformed the S&P 500 by about
10% in 2010, according to Swinburne’s estimates.

Several members of the analyst community are looking
at strong affiliate-fee revenue growth and slight advertising
increases to rule the day in 2012.

“Our forecasts assume that ‘must-have’ programming
(such as sports and broadcast networks) will take an outsize
portion of the TV-subscription pie, leading to either
(1) lower growth rates for lower-barrier-to-entry networks
or (2) higher than expected cost increases for distributors,”
Swinburne wrote.

For cable, Swinburne predicted that national ad revenue
will grow between 5% and 6% for the
year, about half of his 12% estimated
growth rate for 2011. But that could
change, he wrote, given that his 2012
estimates imply that scatter pricing
is flat to down for the year, “which
could prove conservative based on
early 1Q ’12 trends.”

But networks will likely increase
their investments in original content,
which could affect margin
growth, he predicted. On average,
Swinburne predicts that content
costs will rise in the high-single to
low double digit percentage level for
the networks, driving margins below
50% industry-wide.

Miller Tabak media analyst
David Joyce had a similar view.
Joyce expects political advertising
to drive broadcast television ad revenue
up by about 11% for the year,
with domestic cable networks tallying
8% ad growth for the year.

That growth runs the gamut from
large to small programmers. For example,
Joyce predicts that broadcast
ad revenue will rise about 5.1%
at The Walt Disney Co. to $6.13 billion,
cable affiliate-fee revenue rising
4% and cable ad sales up 8.5%
for the year. At Discovery Communications,
domestic ad revenue is expected
to rise 14.4% for the year and
affiliate-fee revenue should grow
9%, according to Joyce.

Disney and Discovery are among
the more popular programmers
among advertisers. According to a
recent Beta Research survey, 56%
of advertising executives intend to
increase their ad spending on Disney’s
ESPN in the next 12 months,
with Discovery Channel a close
second at 46%.