• Cable networks benefit from higher ad rates, subscriber fees
  • Disney results next week will show if renewed optimism lasts

AMC Networks Inc., Discovery Communications Inc. and Scripps Networks Interactive Inc. surpassed Wall Street earnings estimates in the first quarter, boosting investor confidence in the TV industry’s ability to adapt to sweeping changes facing the business.

Shares of all three rose Thursday, clawing back some of the losses from last year and early 2016, when companies led by Walt Disney Co. began warning of slower profit growth because their pay-TV networks were losing subscribers to online services and the industry’s cheaper skinny bundles. AMC Networks and Scripps Networks rose as much as 7.6 percent, while Discovery advanced 6.5 percent, their best gains in months.

Sure the industry is still coping with the fact that fewer U.S. households are getting the typical $85-a-month pay-TV package that includes hundreds of channels. Yet results from the three companies are easing investor concerns that the twin pillars of the media business -- selling advertising and charging affiliate fees to the cable and satellite providers that deliver shows and movies to homes -- are headed off a cliff.

“Affiliate fees will continue to be a good story for most cable networks as the contracts are long-term -- three to five years -- with annual escalators,” said Paul Sweeney, a Bloomberg Intelligence analyst.

Conventional programmers like Disney’s ESPN have had to contend with rising content costs and a drop in subscribers, driven partly by the popularity of streaming services from Netflix Inc. and Amazon.com Inc. Disney triggered a plunge in media stocks in August after lowering its outlook for profit growth in cable TV, citing viewer losses at ESPN as one factor.

AMC Networks, Discovery and Scripps Networks all beat analysts’ profit estimates, partly because they squeezed higher affiliate or subscriber rates out of distributors like Comcast Corp. and DirecTV owner AT&T Inc. That suggests they can still grow even if some customers cancel service, downgrade to lower-priced packages or opt for streaming alternatives. AMC Networks led the group with an 11 percent surge in revenue from distributors, while Discovery and Scripps Networks saw increases of 8 percent and 9 percent, respectively.

Time Warner Inc.’s Turner division also reported higher affiliate fees in the first quarter after renewing deals with its top 10 distributors, sending the same signal.

Disney, the world’s biggest entertainment company, is scheduled to report fiscal second-quarter results after markets close on May 10 and it’s results will help determine whether investors’ new found enthusiasm is warranted. The company is facing two challenges: subscribers losses at ESPN, its most profitable business, and foreign-exchange losses from the strong dollar that are hurting cable TV.

Disney is expected to report profit excluding some items rose to $1.40 a share, the average of analysts’ estimates compiled by Bloomberg, from $1.23 a year earlier. They see sales increasing 6 percent to $13.2 billion.

Ad Growth

Investors are also optimistic about advertising sales. CBS Corp. reported a 49 percent gain in first-quarter ad revenue this week, buoyed by the Super Bowl and extra National Football League games. Excluding those one-time events, underlying ad sales grew 12 percent, the company said. Its share are up 2.4 percent this week.

Ad rates for recent purchases, in the so-called scatter market, have soared.

“The scatter market is as hot as it’s been in many, many years,” CBS Chief Executive Officer Les Moonves said on a call with investors.

In the first quarter, Scripps Networks posted the fastest ad growth in five years, as well as higher ratings at all six of its U.S. networks -- HGTV, DIY Network, Food Network, Cooking Channel, Travel Channel and Great American Country. Earnings excluding some items rose to $1.37 a share, beating analysts estimates of $1.06, while revenue was $816.9 million, topping estimates for $795.3 million. 

At Discovery, domestic ad sales increased 7 percent from a year earlier. Total sales of $1.56 billion rose 2 percent, driven by the U.S. cable networks, which include Discovery, TLC and Animal Planet. Discovery also raised guidance for full-year profit growth to “at least” high teens on a percentage basis, compared with a previous outlook for low teens at best.

AMC Networks posted first-quarter revenue of $706.6 million, up 5.7 percent and beating analysts’ estimates of $695.5 million. Advertising sales at AMC’s national networks -- AMC, WE TV, BBC America, IFC and SundanceTV -- grew 1.3 percent to $264 million.

The company’s flagship AMC network still relies on “The Walking Dead,” which accounts for about a quarter of its prime-time viewers. The sixth season of the show saw average viewership declines, according to Cowen & Co. analysts including Doug Creutz.

“The big story across media is that TV ad spending continues to strengthen from a period of weakness last year,” Sweeney said. “The scatter market is very strong which is helping most broadcast and cable networks.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE