Analyst sez short-term cost savings buff up results

Earnings at a clutch of major media congloms may have beat Wall Street’s expectations for the fourth quarter, but the sector’s performance isn’t all it’s cracked up to be by one prominent analyst’s estimation.

In a detailed research note, Michael Nathanson of Nomura Securities questioned whether what he interprets as short-term belt-tightening at the congloms that have reported earnings so far may be inflating their margins.

“With revenues coming in as expected but earnings beating handily, the upside in earnings and operating profit growth were driven by the expense line,” Nathanson wrote Tuesday. “In fact, we would argue that the industry did a remarkable (but likely unsustainable) job in reining in operating expenses in the quarter.”

The NBA lockout was one factor driving cost savings that magnified revenues for the quarter, with News Corp. in particular reporting a $55 million boost to profits as a result of the league’s delayed start to the season. Those costs will increase when next season is played in full, and other expenses kick in, such as an expected hike in marketing costs for cable networks experiencing softening ratings.

Cost growth for News Corp., Disney, Viacom, Scripps and Time Warner was just 0.1% for the fourth quarter, according to Nathanson. When filmed entertainment results are pulled out of the equation — a calculation Nathanson explains provides a clearer sense of a company’s fundamentals considering the volatility of recording revenue and earnings in this realm — aggregate costs for the five companies drop 0.4%.

The biggest revenue drivers for these congloms — advertising sales and affiliate fees paid by cable, satellite and telco operators — also provide a skewed sense of the sector’s overall performance, according to Nathanson.

While in aggregate both are up, that’s due to a wide divergence in the results reported across these companies. Affiliate revenue growth, for instance, is up 10% across the five companies, but Viacom’s 15.8% increase for the quarter is a far cry from the 4.6% Time Warner reported for the same measure.

Nathanson is bullish on News Corp. and Disney due to strong affiliate growth on the horizon.

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