Walt Disney Co.’s darkened outlook dragged down media stocks from Time Warner Inc. to 21st Century Fox Inc. and CBS Corp.
Disney, which through Tuesday had been the top-performing stock in the Dow Jones Industrial Average this year with a record of stellar sales and profit, surprised investors by posting lower-than-estimated quarterly revenue and cutting its forecast for cable-television profit.
The reduced forecast underscored the number one concern for media investors: the unraveling of the traditional pay-TV package, according to Paul Sweeney, an analyst at Bloomberg Intelligence. Fewer Americans are paying for bundles of hundreds of channels, which has underpinned the TV industry’s business model for decades, opting instead for online video services like Netflix Inc. or smaller packages.
Disney’s shares slumped as much as 10 percent -- the most since August 2011 -- while Fox and CBS Corp., which both report earnings after the close, dropped more than 5 percent. Time Warner and Scripps Networks Interactive Inc., the owner of Food Network and HGTV, also fell even though they beat second-quarter earnings predictions. Overall, the Bloomberg U.S. Media Index had its biggest intraday decline in almost four years.
“Investors are definitely reading across the Disney earnings and extrapolating it to the broader media sector,” Sweeney said.
Noticeably, Netflix gained 2.6 percent to a record high amid the media stock meltdown.
Another factor weighing on media shares are concerns that cash returns that have boosted prices in the past seven years may be slowing, Sweeney said. Scripps’s earnings statement showed that the company didn’t repurchase shares last quarter, while Discovery said it’s unlikely to buy back more stock this year to maintain its credit ratings.
“The market appears to be interpreting this cautious balance sheet management as reduced confidence in business trends going forward,” Sweeney said.
Disney is facing two challenges of it own: fewer subscribers at cable networks such as ESPN, its biggest business, and foreign exchange losses from the strong dollar that are hurting both cable TV and international theme parks.
But the concerns over ESPN’s growth and comments on affiliate revenue from pay-TV providers, which Disney now expects to fall short of previous forecasts, may be a gauge for other media companies.
Both Time Warner and Fox are doubling down on exclusive live sports programming to demand higher fees for their channels from pay-TV distributors. And those higher fees have helped them fuel earnings growth in recent quarters. CBS has also pushed into sports programming.
Time Warner’s decision to keep its full-year profit forecast after second-quarter earnings per share beat analysts’ predictions by a wide margin also weighed on the stock Wednesday. Maintaining the guidance suggested estimates for the second half may be too high, Sweeney said. Shares of the New York-based owner of HBO were down 9.9 percent to $79.02 at 3:18 p.m. in New York.
Discovery, which dropped 13 percent to $28.75, posted results that fell short of sales and earnings estimates Wednesday. The cable-TV company still increased its outlook for annual earnings-per-share growth, excluding foreign exchanges.
Cable-TV stocks like Scripps and Viacom Inc., which reports earnings Thursday morning, suffered after Disney cut its forecast for cable profit. For fiscal 2013 to 2016, the entertainment giant had promised profit growth in the high-single-digit range. Now, with just five quarters to go, the company expects a mid-single-digit gain for the division over that time frame.