Media Stocks: Recovering Nicely

by: Jim Delaney

In a constant attempt to press beyond the predictions and possible prevarications of the pundits and instead to pursue the particulars that have swapped probability for certainty, we look today at the “press” or what is more broadly described as media in these times of globalistic all encompassing monikers.

CBS Corp.’s (NYSE:CBS) earnings release came with news that local level TV stations saw an 11% increase in nonpolitical advertising in 4Q09 while the national market realized revenue gains of 8%. Part of the reason for the increase is a result of what is known in the business as scatter or, as you and I would think about it, advertising sold close to the air date - which can fetch rates 30% higher than prices negotiated before the season starts.

“We are clearly a prime beneficiary of the recovering economy”, Chief Executive Leslie Moonves said. It should also be noted that radio-station revenue was down 12% and outdoor-advertising receipts fell 8%. “Radio will be showing plus signs in the first quarter”, Mr. Moonves assured.

News Corp. (NASDAQ:NWSA) also had some good news at earnings time, returning to a profit for its fiscal second quarter benefiting from the $2BN rung up in Avatar earnings, which helped raise revenue 10% in the most recent period. The company also said it expects its operating income to increase “in the low 20% range” (minus some items) for the year ending 6/30/2010.

After a highly publicized tussle over fees to carry the Fox broadcast network over Time Warner Cable’s (TWC) system, Rupert Murdoch called the deal “ground breaking” and said it would put Fox on the path to a healthy future. This is evidently a change from the network’s current money losing ways according to people familiar with the situation.

NWSA hasn’t decided if or how it will charge for access to its websites just yet and it has also said it prefers Apple Inc.’s (OTC:APPL) pricing plans for the books that come from its HarperCollins Company versus the plan used by Inc. (NASDAQ:AMZN) for its Kindle e-reader.

On the print side of the business the Audi Bureau of Circulations reported that single-copy magazine sales declined at a 9.1% rate in 2H09. To the extent that declines in sales are never good they should be measured against the 12% decline experienced in the first half of 2009 and the 11% drop in the 2nd half of 2008. Ken Goodall, EVP of Consumer Marketing at Magazine Publishers of America, said he was “encouraged” by the lower rate of decline and thought, “Hopefully we’ve turned the corner”. We do to, Ken.

The CDS/equity combo for CBS has shown a reasonably well connected negative correlation from the lows of a year ago. The 52-week high in the stock was reached on 12/29/2009 at $14.35, just about a week before the lows in the CDS (105bps) were touched on 1/6/2010. The CDS closed at 143bps last night with the stock at $13.32.

Interestingly, the same can be said for NWSA, only its stock peaked on January 6th of this year, long after the CDS bottomed at 43bps in August of 2009. Last night’s closing levels were 66bps and $13.49 respectively.

Not to be completely boring here, but TWC looks like a mirror image of CBS and NWSA with regard to the relationship between its CDS and equity. The CDS bottomed at 87bps on 7/31/2009 but the stock has continued to climb and closed at $46.92 last night, just a few cents shy of the 52-week high close of $46.98 on January 19th.

There are no CDS contracts for AMZN or APPL.