S&P’s latest Industry Report Card sees a negative outlook for most sectors, and it could get worse.
Selected excerpts:
Standard & Poor’s Ratings Services expects that 2009 fourth-quarter data will bring easier year-over-year financial comparisons for U.S. media and entertainment companies due to a generally dismal fourth quarter of 2008. However, the credit outlook is still grim for these issuers, and we think that even the first quarter of 2010 could still see lower revenues and earnings.
A convincing upturn in the sector may not take hold until a solid U.S. economic recovery registers. Earnings prospects for certain advertising-related subsectors are declining somewhat less quickly, but they haven’t begun an upswing. For some subsectors under siege by adverse structural shifts (e.g., print-related industries), we don’t expect much of a rebound at all.
Many of the subsectors in the U.S. media and entertainment industry rely heavily on advertising. For these subsectors, our credit outlook incorporates the following trends:
- Online media is absorbing a significant share of total ad spending, as search-related advertising seems likely to keep growing on a full-year basis even though total Internet ad spending will likely be flat to down. We believe that nascent mobile and online video advertising will sprout vigorously.
- Cable networks appear likely to report slightly lower full-year 2009 ad revenue.
- Local TV, radio, newspapers, and national magazines likely will sustain further revenue declines (albeit at decelerating rates), translating into further EBITDA falloffs–especially for broadcasters, because of their high EBITDA margins. This already has created a worst-case scenario for many rated local newspaper, radio, and TV station groups.
- Outdoor advertising has dropped sharply, unable to sustain pricing when alternative local media rates are plummeting.
- Structural factors also could curtail ad spending, such as Congressional proposals to eliminate tax deductibility of certain sectors’ ad spending.
Newspapers May Be Nearing The Bottom, But Will Likely Stay There
For the subsectors that don’t rely on advertising, technology and consumer usage shifts, along with the audience reception of content, have had a greater influence than economic trends. Still, economic stresses on some of these non-ad-reliant subsectors are still apparent:
- The recorded music industry has experienced further rapid CD sales declines.
- Movie producers continue to indicate lower DVD sales–especially for catalog titles.
- Late in the fourth quarter, motion picture exhibitors resumed the vigorous positive growth that they enjoyed in the first half of the year. We view box office revenues as likely to dip into negative territory in 2010 year-over-year comparisons. We ascribe the 2009 pop to consumers seeking relatively low-cost entertainment close to home rather than pursuing family travel.
