We hosted IR management meetings in New York with representatives from CBS, FOXA, IPG, LGF, MDCA and OMC. Below we summarize the key themes/conclusions.
TV advertising is performing in-line with company expectations, but is it above investor expectations?
In contrast to investor sentiment, Media companies did not paint a bearish view on TV ad trends. Scatter and Upfront pricing is trending healthily up, and in-line with their expectations from Q1 results. Upfront negotiations continue with media companies expecting historical levels of inventory allocations, more CPM expansion and a continued shift towards more comprehensive measurement currencies. Investor sentiment around ad revenues is decidedly negative, which begs the question that if ad growth for Q2 and H2 comes in at current forecasts is there upside to the stocks? With a decent macro backdrop, we think ad growth is more likely than sub loss to surprise to the upside.
Content is King as the Bundle Fragments
On the distribution side, the companies we spoke to are in favor of skinnier bundles, OTT platforms and vMVPDs as they each view the big bundle “paywall” as an accelerant for cord cutting and/or a hindrance to getting to premium content. We noted a common theme towards gaining and retaining full in-season stacking (not just 5 episodes) + library in new distribution arrangements to make the viewing experience more aligned with customer behavior (and SVOD competitors). Time will tell whether content companies can resist the allure of exclusive and lucrative SVOD sales for legacy content, and whether vMVPDs are effective enough to mitigate cord cutting. Subscriber declines are still considered the biggest risk to Media following the acceleration in sub loss seen in Q1.
Ad Agencies: Business as Usual
Advertising Agencies generally suggested that 2017 remains largely on track, with the companies guiding to organic growth of ~3-4% on average with no “new negatives” to call this into question. Weakness in retail and consumer products remains a hang-up for investors, while the Agencies tend to discuss the portfolio effect of verticals under pressure offset by verticals with growth. We think Ad Agency sentiment has improved over the last 60 days, and it’s probably not coincidental with deteriorating sentiment for Media names.
All Eyes on Q2 Previews & Results
While the data points were helpful we don’t think debates were settled in our meetings. Overall, we think conviction in the sector is pretty low as investors worry about incremental downside from advertising and cord cutting in Media and fee pressure at the Agencies. We think relative safe-havens like IPG and DIS are most liked with longer-term buyers, while most of the rest of the group remains a trading space in the eyes of the market pending better visibility of fundamentals. We thus don’t think sentiment will meaningfully change until Q2 results provide more tangible evidence around the key debates.
All values in USD unless otherwise noted.
Priced as of June 14, 2017 market close, EST (unless otherwise stated).
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